-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1VsjpgPYvknlOwgM5Ks+a9dPf4lMft+b4wjiOgmPNSIveUta0+05RlFZ4HzRoQ3 /7jSHNYz86eu3i+oiAE6aQ== 0000950132-00-000229.txt : 20000331 0000950132-00-000229.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950132-00-000229 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BELL BANCORP INC CENTRAL INDEX KEY: 0000932697 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 251752651 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25091 FILM NUMBER: 585334 BUSINESS ADDRESS: STREET 1: 300 DELAWARE AVENUE STREET 2: SUITE 1704 CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 3024277883 MAIL ADDRESS: STREET 1: 532 LINCOLN AVE CITY: PITTSBURGH STATE: PA ZIP: 15202 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission File No,: 0-25172 FIRST BELL BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 25-1752651 (state or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801 (Address of principal executive offices) Registrant's telephone number, including area code: (302) 427-7883 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $74,887,904 and is based upon the last sales price as quoted on The Nasdaq Stock Market for March 1, 2000. As of March 1, 2000, the Registrant had 5,104,763 shares outstanding (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1999 are incorporated by reference into Part II of this Form 10-K. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. INDEX PAGE ---- PART I Item 1. Business..................................................... 1 Item 2. Properties................................................... 29 Item 3. Legal Proceedings............................................ 29 Item 4. Submission of Matters to a Vote of Security Holders.......... 29 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 29 Item 6. Selected Financial Data...................................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 30 Item 7A. Quantitative and Qualitative Disclosure about Market Risk.... 30 Item 8. Financial Statements and Supplementary Data.................. 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 32 PART III Item 10. Directors and Executive Officers of the Registrant........... 32 Item 11. Executive Compensation....................................... 32 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 32 Item 13. Certain Relationships and Related Transactions............... 33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 33 SIGNATURES............................................................... 35 PART 1 Item 1. Business General First Bell Bancorp, Inc (the "Company") was orgainzed by the Board of Directors of Bell Federal Savings and Loan Association of Bellevue (the "Association") for the purpose of acquiring all of the capital stock of the Association issued in connection with the Association's conversion from a mutual to stock form, which was consummated on June 29, 1995,(the "Conversion"). At December 31, 1999, the Company had consolidated total assets of $816.1 million and total equity of $54.5 million. The Company is incorporated under Delaware law and is a savings and loan holding company subject to regulations by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). Currently, the Company does not transact any material business other than through its subsidiary, the Association. All references to the Company include the Association unless otherwise indicated, except that references to the Company prior to June 29, 1995 are to the Association. Bell Federal Savings and Loan Association of Bellevue was originally founded in 1891 as the Commercial Building and Loan Association, a state chartered building and loan association. In 1941, the Association converted to a federally chartered mutual savings and loan association and changed its name to First Federal Savings and Loan Association of Bellevue. The Association again changed its name in 1971 to Bell Federal Savings and Loan Association of Bellevue. The Association's deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"). The Association's business is conducted through six branch offices located thoughout the suburban Pittsburgh, Pennsylvania area and its principal office in the borough of Bellevue. The Company's principal executive office is located at Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801 and its executive office telephone number is (302) 427-7883. The principal business of the Company is to operate a traditional customer oriented savings and loan association. The Company attracts retail deposits from the general public and invests those funds primarily in fixed and adjustable-rate, owner-occupied, single family conventional mortgage loans and, to much lesser extent, residential construction loans, multi-family loans, home equity loans and consumer loans. The Company's revenues are derived principally from interest on conventional mortgage loans, interest and dividends on investment securities and short-term investments and other fees and service charges. The Company's primary sources of funds are deposits and borrowings. The Association is subject to extensive regulation, supervision and examination by the OTS, its primary regulator and the FDIC, which insures its deposits. The Association is a member of the FHLB ("Federal Home Loan Bank"). 1 Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this 10-K includes certain forward looking statements based on current management expectations. Examples of this forward looking information can be found in, but are not limited to, the allowance for losses discussion and certain sections of the 1999 Annual Report incorporated herein. The Company's actual results could differ materially from those of management's expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Market Area and Competition The Association has been, and continues to be, a community-oriented savings institution offering a variety of financial services to meet the needs of the community it serves. Its primary market area is in the areas surrounding its offices, while its lending activities extend throughout Allegheny County and parts of Beaver, Butler, Washington and Westmoreland Counties, in Pennsylvania. In addition to its principal office in Bellevue, the Association operates six other retail offices, all of which are located in Allegheny County. The communities in Allegheny County are composed mostly of stable, residential neighborhoods of predominantly one and two-family residences and middle-to- upper-income families. Management believes that, to a large degree, the economic vitality of these communities depends on the economic vitality of the City of Pittsburgh. The Greater Pittsburgh area has been in the process of restructuring over the past decade. Once centered on heavy manufacturing, primarily steel, its economic base is now more diverse, including technology, health and business services. Several "Fortune 500" industrial firms are headquartered in the Greater Pittsburgh area, including USX Corp. and Aluminum Company of America. The largest employers in Pittsburgh, by the number of local employees, include University of Pittsburgh Medical Center, USAirways, the University of Pittsburgh and Mellon Bank Corp. Seven colleges and universities are located in the Greater Pittsburgh area. The Association serves its market area with a wide selection of residential loans and other retail financial services. Management considers the Association's reputation for customer service as its major competitive advantage in attracting and retaining customers in its market area. The Association also believes it benefits from its community orientation, as well as its established deposit base and level of core deposits. 2 Lending Activities Loan and Mortgage-Backed Securities Portfolio Composition. The loan portfolio consists primarily of conventional mortgage loans secured by one- to four- family, owner-occupied residences, and, to a much lesser extent, residential construction loans, multi-family loans, home equity loans and consumer loans. Mortgage loans are originated to be held in the portfolio. At December 31, 1999, total loans receivable were $545.2 million, of which $516.5 million, or 94.7%, were conventional mortgage loans. Of the conventional mortgage loans outstanding at that date, 95.6% were fixed-rate loans. At December 31, 1999, the loan portfolio also included $16.2 million of residential construction loans; $500,000 of multi-family loans; $11.0 million of residential home equity loans; and $967,000 of other consumer loans. The Association also offers FHA/VA qualifying one- to four-family residential mortgage loans. The types of loans originated are regulated by federal law and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, legislative and tax policies and governmental budgetary matters. Set forth below is a table showing loan origination, purchase and sales activity for the periods indicated.
For the Year Ended December 31, ------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ (in thousands) Loan receivable at beginning of period $559,846 $596,003 $547,210 Additions: Originations of conventional mortgages 82,564 66,825 129,043 Reductions: Transfer of mortgage loans to foreclosed real 459 201 104 estate Repayments 96,729 102,781 50,157 Loan sales - - 29,989 -------- -------- -------- Total reductions 97,188 102,982 80,250 -------- -------- -------- Total loans receivable at end of period $545,222 $559,846 $596,003 ======== ======== ======== Mortgage-backed securities at beginning of period $ - $ 31,885 $ - Purchases - - 92,528 Sales - 30,255 46,676 Repayments - 1,402 14,000 Premium amortization - 228 197 Unrealized gain or loss - - 230 -------- -------- -------- Mortgage-backed securities at end of period $ - $ - $ 31,885 ======== ======== ========
(1) Includes conventional mortgages, residential construction loans and home equity mortgage loans. (2) The Association originated no multi-family loans during the periods shown. 3 The following table sets forth the composition of the loan portfolio and the mortgage-backed securities portfolio in dollar amounts and in percentages of the portfolio at the dates indicated.
1999 1998 1997 ---- ---- ---- Percent of Percent of Percent of Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- Real estate loans: Conventional mortgages $516,514 94.73% $535,864 95.72% $568,405 95.37% Residential construction loans 16,229 2.98 17,924 3.20 25,563 4.29 Multi family loans 500 0.09 651 0.12 860 0.14 Second mortgage loans 11,012 2.02 4,508 0.81 268 0.05 -------- ------ -------- ------ -------- ------ Total real estate loans 544,255 99.82 558,947 99.85 595,096 99.85 Consumer loans: Loans on deposit accounts 967 0.18 895 0.15 899 0.15 Home improvement loans - - 4 - 8 - -------- ------ -------- ------ -------- ------ Total consumer loans 967 0.18 899 0.15 907 0.15 -------- ------ -------- ------ -------- ------ Total loans receivable 545,222 100.00% 559,846 100.00% 596,003 100.00% ====== ====== ====== Less: Undisbursed portion of loans in process 8,652 10,354 12,072 Deferred net loan origination fees 2,386 3,153 3,822 Allowance for loan losses 925 805 715 -------- -------- -------- Loans receivable, net $533,259 $545,534 $579,394 ======== ======== ======== Morrtage-backed securities GNMA $ - -% $ _ -% $ 26,958 84.55% FHLMC - - - - - - FNMA - - - - 4,927 1 5.45 -------- ------ -------- ------ -------- ------ Total mortgage-backed securities $ - -% $ - -% $ 31,885 100.00% ======== ====== ======== ====== ======== ====== At December 31, (in thousands) 1996 1995 ---- ---- Percent of Percent of Amount Total Amount Total ------ ----- ------ ----- Real estate loans: Conventional mortgages $524,867 95.92% $409,807 94.67% Residential construction loans 19,877 3.63 19,692 4.55 Multi family loans 1,220 0.22 2,075 0.48 Second mortgage loans 297 0.06 330 0.08 -------- ------ -------- ------ Total real estate loans 546,261 99.83 431,904 99.78 Consumer loans: Loans on deposit accounts 938 0.17 937 0.22 Home improvement loans 11 - 22 - -------- ------ -------- ------ Total consumer loans 949 0.17 959 0.22 -------- ------ -------- ------ Total loans receivable 547,210 100.00% 432,863 100.00% ====== ====== Less: Undisbursed portion of loans in process 11,120 11,182 Deferred net loan origination fees 4,610 5,537 Allowance for loan losses 665 575 -------- -------- Loans receivable, net $530,815 $415,569 ======== ======== Morrtage-backed securities GNMA $ - -% $ -% FHLMC - - - - FNMA - - - - -------- ------ -------- ------ Total mortgage-backed securities $ - -% $ - -% ======== ====== ======== ======
4 Loan Maturity Schedule. The following table sets forth certain information at December 31, 1999 regarding the dollar amount of loans maturing in the portfolio based on their remaining contractual terms to maturity. The table does not include the effect of prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on loans totalled $96.7 million, $102.8 million and $50.2 million for the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999 (in thousands) ------------------------------------------------------------------------------------- More Than More Than Six More Than One Three Months Three Months Months to Year to Three or Less to Six Months Twelve Months Years ------------------------------------------------------------------------------------- Interest-earning Assets: Real estate loans: One-to-four-family adjustable- rate loans........................ $ -- $-- $-- $ 27 One-to-four-family fixed-rate loans............................. 39 1 11 643 Residential construction loans -- -- -- -- Multi family......................... 1 -- -- 27 Second mortgage loans................. 1,650 65 71 119 ------ --- --- ---- Total Real Estate Loans 1,690 66 82 816 Consumer Loans 967 -- -- - ------ --- --- ---- Total loans....................... $2,657 $66 $82 $816 ====== === === ==== More Than More Than Three Years to Five Years to More Than Ten Five Years Ten Years Years Total ----------------------------------------------------------------- Interest-earning Assets: Real estate loans: One-to-four-family adjustable- rate loans........................ $ 179 $ 275 $ 22,031 $ 22,512 One-to-four-family fixed-rate loans............................. 2,182 42,128 448,998 494,002 Residential construction loans -- -- 16,229 16,229 Multi family......................... 127 168 177 500 Second mortgage loans................. 7,980 1,101 26 11,012 ------- ------- -------- -------- Total Real Estate Loans 10,468 43,672 487,461 544,255 Consumer Loans -- -- -- 967 ------- ------- -------- -------- Total loans....................... $10,468 $43,672 $487,461 $545,222 ======= ======= ======== ========
5 The following table sets forth the dollar amount of all loans and mortgage-backed securities at December 31, 1999 which have fixed or adjustable interest rates, and which are due after December 31, 2000.
Due After December 31, 2000 -------------------------------------------------- Fixed Adjustable Total -------------- ------------------ -------------- (In thousands) Real estate loans: Conventional mortgages.................... $493,951 $22,512 $516,463 Residential construction.................. 12,293 3,936 16,229 Multi-family.............................. 500 - 500 Second mortgage........................... 8,299 927 9,226 Consumer loans.............................. - - - -------- ------- -------- Total loans............................ $515,043 $27,375 $542,418 ======== ======= ========
One- to Four-Family Residential Mortgage Lending. The residential mortgage loans are primarily secured by owner-occupied, one- to four-family residences. Loan originations are generally obtained from existing or past customers, members of the local communities served, or referrals from local real estate agents, attorneys and builders. The Association originates fixed-rate loans and adjustable rate mortgage ("ARM") loans. At December 31, 1999, conventional mortgage loans totalled $516.5 million, or 94.7%, of total loans at such date. Of the Association's conventional mortgage loans secured by one- to four-family residences, $494.0 million, or 95.6%, were fixed-rate loans. Originated mortgage loans are held in the loan portfolio and are secured by properties located within the Association's primary market area. Historically, the market interest rates of mortgage loans in the Pittsburgh area have been below national averages. The mortgage loan portfolio has increased from $431.9 million at December 31, 1995 to $544.2 million at December 31, 1999. The Association from time to time purchases one- to four-family mortgage loans and loan participations. A number of these loans are secured by properties located outside the Association's market area, such as other regions of Pennsylvania, California, Illinois, Maryland, New York, Texas, Virginia, Utah, North Carolina, Tennessee and Georgia. The Association did not purchase any mortgage loans or participations in 1999. At December 31, 1999, the Association had $13.6 million in purchased mortgage loans and loan participations serviced by others, totalling 2.5% of the total loan portfolio at that date, primarily secured by one- to four-family residences. The Association intends to continue purchasing loans to supplement reduced loan demand as needed. Loans purchased generally must meet the same underwriting criteria as loans originated by the Association. 6 In 1999 and 1998, the Association did not participate in any sales of conventional mortgage loans. During 1997, the Association sold $30.0 million in conventional mortgages. Most of the loan portfolio is underwritten in conformity with Federal National Mortgage Association ("FNMA") secondary market requirements. Although the Association has been approved by FNMA to sell loans in the secondary market, there is no assurance that the Association will be able to originate loans for sale in the secondary market or, that if originated, such loans will be sold in the secondary market in the future. Should the Association decide to sell mortgage loans in the future, the lower interest rates on such loans, characteristic of the Pittsburgh market, may tend to diminish the demand for such loans in the secondary market. With the exception of Community Reinvestment Act ("CRA") loans, the maximum loan-to-value ratio on conventional mortgage loans is 80%. As a result, a majority of borrowers are previous homeowners, whom the Association believes to be relatively stable borrowers. The Association also offers FHA/VA qualifying one-to four-family residential mortgage loans. One-to four-family residential mortgage loans do not provide for negative amortization. Mortgage loans in the portfolio generally include due-on-sale clauses, which provide the Association with the contractual right to demand the loan immediately due and payable in the event that the borrower transfers ownership of the property that is subject to the mortgage. It is the Association's policy to enforce due-on-sale clauses. The residential mortgage loans originated are generally for terms to maturity from 15 to 30 years. At December 31, 1999, the maximum one-to four-family loan amount is $600,000, unless otherwise approved by the Board of Directors. Presently, four ARM loans are offered; a one-year, three-year, five-year and 7/1 ARM loan. The one-year ARM loan has an interest rate that adjusts annually based on a spread of 2.50 percentage points above the rate on one-year United States Treasury securities. The one-year ARM loan is subject to a limitation on interest rate increases and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of 6.0% above the origination rate, and a floor rate equal to the origination interest rate. This mortgage can convert to a fixed-rate loan at specified times during the first five years. The three-year ARM loan has an interest rate that adjusts every three years based on a spread of 2.75 percentage points above the rate on the three year United States Treasury securities. The three-year ARM is subject to a limitation on interest rate increases and decreases of 2% per change, a lifetime ceiling on the interest rate of 6.0% above the origination rate and a floor rate equal to the origination interest rate. The five-year ARM loan has an interest rate that adjusts every five years based on a spread of 2.75 percentage points above the rate on five-year United States Treasury securities. The five-year ARM loan is subject to a limitation on interest rate increases and decreases of 3.0% per change, a lifetime ceiling on the interest rate of 6.0% above the origination rate, and a floor rate equal to the origination interest rate. The 7/1 ARM loan has an interest rate that remains constant for the first seven years and then the interest rate adjusts annually based on a spread of 2.50 percentage points above the rate on one-year United States Treasury securities. After the initial seven years, this ARM loan is subject to a limitation on interest rate increases and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of 6.0% above the origination rate, and a floor equal to the origination interest rate. The mortgage can convert to a fixed-rate loan at the first change date. 7 The volume and types of ARM loans originated are affected by such market factors as the level of interest rates, competition, consumer preferences and the availability of funds. In recent years, demand for ARM loans has been weak due to the low interest rate environment and consumer preference for fixed rate loans. In 1999, only $5.1 million of the $74.1 million, or 6.8%, of conventional mortgage loans originated, excluding home equity loans, were adjustable mortgages. Although ARM loans will continue to be offered, there can be no assurance that in the future ARM loans will be originated in sufficient volume to constitute a significant portion of the loan portfolio. In an effort to provide financing for low and moderate income home buyers, additional single family residential mortgage loans are offered to moderate income borrowers and residents of CRA neighborhoods, with terms of up to 30 years. Such loans must be secured by a single family, owner-occupied unit. These loans are originated using modified underwriting guidelines with reduced down payments and expenses. Private mortgage insurance is normally required. Because the Association typically charges a lower rate of interest, lower mortgage origination fees and a discount on closing costs on its CRA loans, a lower rate of return is expected on such loans, as compared to other residential mortgage loans. For the years ended December 31, 1999, 1998 and 1997, the Association originated 47, 43 and 24 loans under the CRA loan program, with aggregate dollar amounts of $2.8 million, $2.0 million and $1.2 million, respectively. Residential Construction Loans. The Association originates loans for the construction of one-to four-family residential properties. Such loans are made on contract directly to the home buyer. Residential construction loans are subject to the same maximum loan amounts as conventional mortgage loans. Residential construction loans are made for terms of up to one year, at which time the loans convert to permanent conventional mortgage financing. Residential construction loans are generally offered at the Association's prevailing interest rate. An additional fee may be charged for construction servicing. Advances are made to builders as phases of construction of the property are completed. As of December 31, 1999, the Association's residential construction loans totaled $16.2 million, or 3.0% of the total loan portfolio. Of these construction loans, $8.6 million had been committed but were undisbursed as of that date. Construction lending involves greater risks than other loans due the fact that loan funds are advanced upon the security of the project under construction and are predicated on the future value of the property upon completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays resulting from labor problems, material shortages or weather conditions and other unpredictable contingencies, it is relatively difficult to evaluate accurately the total funds required to complete a project and to establish the related loan-to-value ratio. Because of these factors, the analysis of prospective construction loan projects requires an expertise that is different in significant respects from that which is required for residential mortgage lending. 8 Multi-Family Loans. In prior years, the Association also originated multi-family loans. As of December 31, 1999, the Association's total loan portfolio contained 12 multi-family loans, totalling $500,000, or 0.1%, of total loans. Since 1991, the Association has not originated any multi-family mortgage loans. In the future, the Association may originate a limited number of multi- family loans on a case-by-case basis. The multi-family loans in the Association's portfolio consist of fixed-rate rate loans which were originated at prevailing market rates. The Association's policy has been to originate multi-family loans only in its market area. In making multi-family loans, the Association considers primarily the ability of net operating income generated by the real estate to support the debt service, the financial resources and income level and managerial expertise of the borrower, the marketability of the property, and the Association's lending experience with the borrower. Second Mortgage Loans. During 1998, the Association began offering home equity installment and line of credit loans to homeowners in its lending territory. Home equity installment loans are underwritten for a fixed rate with a five year term or an adjustable rate ten year term in which the rate adjusts after the fifth year based on the prime rate. Line of credit loans can be drawn on for ten years and paid back in twenty years and are based on the prime rate. The Association offers second mortgage loans with maximum combined loan-to-value ratios of up to 80%. During 1999 the Association originated $7.1 million in installment loans and had made disbursements of $1.1 million for line of credit loans. At December 31, 1999, the Association had $11.0 million or 2.0% of total loans in second mortgage loans. Consumer Loans. The Association also offers secured consumer loans. At December 31, 1999, the Association's consumer loans totalled $967,000, or 0.2% of the Association's total loan portfolio, all of which were secured by deposit accounts. Loan Servicing and Loan Fees. Servicing on all loans that have been sold has been retained. Fees are received for these servicing activities, which include collecting and remitting loan payments, inspecting the properties and making certain insurance and tax payments on behalf of the borrowers. At December 31, 1999, the Association was servicing $19.1 million of loans for others. Loan servicing income was $7,000, $9,000 and $37,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Association also receives income in the form of service charges and other fees on loans. For the years ended December 31, 1999, 1998 and 1997, the Association earned $149,000, $198,000 and $214,000, respectively, in service charges and other fees. Mortgage-backed Securities. At December 31, 1999 and 1998, the Association had no mortgage-backed securities. During the first quarter of 1998, the remaining balance of the mortgage-backed securities portfolio was sold which resulted in a gain of $97,000. In 1997, the Association purchased $92.5 million in adjustable rate mortgage-backed securities. These securities were classified as available-for-sale. Subsequently, in 1997, the Association sold $46.7 million of these securities. At December 31, 1997, mortgage-backed securities totaled $31.9 million. The Association may invest in 9 mortgage-backed securities in the future to offset any significant decrease in demand for one-to four-family loans. Loan Approval Procedures and Authority. Loan approval authority has been granted by the Board of Directors to the Association's Loan Committee. All mortgage loans must be approved by the Loan Committee. As of December 31, 1999, any loan application over $600,000 must be approved by the Board of Directors. Upon receipt of a completed loan application from a prospective borrower, the Association generally orders a credit report, verifies employment, income and other information, and, if necessary, obtains additional financial or credit related information. An appraisal of the real estate used for collateral is also obtained. All appraisals are performed by licensed certified appraisers. The Board of Directors annually approves the independent appraisers used by the Association and reviews the Association's appraisal policy. When the credit information is obtained and an appraisal is completed, loans are presented for approval to the Association's Loan Committee. The Loan Committee must approve all one-to four-family mortgage loans originated by the Association. The Association's policy is to require either title insurance or an attorney's opinion of title, and hazard insurance on all real estate loans. Borrowers are required to advance funds together with each payment of principal and interest to a mortgage escrow account from which the Association makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums, if required. Asset Quality Loan Collection. When a borrower fails to make a required payment on a loan, the Association takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. The borrower is sent a written notice of non-payment when the loan is 15 days past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current and it becomes necessary to take legal action, which typically occurs after a loan is delinquent 120 days or more, the Association may commence foreclosure proceedings against the real property that secures the loan. Decisions as to when to commence foreclosure actions are made on a case by case basis. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced within 30 days of delivery of the notice of default and intent to foreclose, the real property securing the loan is generally sold at foreclosure or by the Association as soon thereafter as practicable. On purchased mortgage loans or loan participations, monthly reports are received form loan servicers in order to monitor the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Association relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and to initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Association and its servicing agents. 10 Delinquent Loans. At December 31, 1999, 1998 and 1997, delinquencies in the loan portfolio were as follows:
At December 31, 1999 At December 31, 1998 -------------------------------------------------- ---------------------------------------------- 60 - 89 Days 90 Days or More 60 - 89 Days 90 Days or More ------------------------- ------------------------ ------------------------ --------------------- Principal Principal Principal Principal Number of Balance of Number of Balance of Number of Balance of Number of Balance of Loans Loans Loans Loans Loans Loans Loans Loans ----- ----- ----- ----- ----- ----- ---- ----- (Dollars in thousands) (Dollars in thousands) Conventional mortgage loans... 2 $ 127 7 $ 269 3 $ 156 7 $ 498 Multi-family loans............ -- -- -- -- -- -- -- -- Consumer loans................ -- -- -- -- -- -- -- -- -------- ----- -------- ----- ------- -------- ---- ------- Total loans.............. 2 $ 127 7 $ 269 3 $ 156 7 $ 498 ======== ===== ======== ===== ======= ======== ==== ======= Delinquent to total loans..... 0.02% 0.05% 0.03% 0.09% ===== ===== ======== =======
At December 31, 1997 -------------------------------------------------------------------------------- 60 - 89 Days 90 Days or More ------------------------------ -------------------------------- Principal Principal Number of Balance of Number of Balance of Loans Loans Loans Loans --------------- ------------- ------------ ---------- (Dollars in thousands) Conventional mortgage loans... 8 $ 436 13 $ 634 Multi-family loans............ -- -- -- -- Consumer loans................ - -- -- -- --- -------- ------ ------ Total loans.............. 8 $ 436 13 $ 634 === ======== ====== ====== Delinquent loans to total loans 0.07% 0.11% ===== ======
11 Non-Performing Loans and Real Estate Owned. The following table sets forth information regarding non-accrual mortgage and other loans and real estate owned ("REO"). Interest is not accrued on loans past due 90 days or more. The Association had $390,000 in real estate owned and no in substance foreclosures at December 31, 1999. During the years ended December 31, 1999, 1998 and 1997, the amounts of interest income that would have been recorded on non-accrual loans, had they been current, totalled $6,000, $32,000 and $29,000, respectively. Interest income recorded on non-accrual loans was $8,000, $18,000 and $36,000 for each of the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, ------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------- (Dollars in Thousands) Non-accrual delinquent mortgage loans $ 269 $ 498 $ 634 $ 400 $ 333 Non-accrual delinquent other loans.............. -- -- -- -- -- ----- ----- ----- ----- ----- Total non-performing loans.................... 269 498 634 400 333 Real estate owned............................... 390 82 -- 229 178 ----- ----- ----- ----- ----- Total non-performing assets.................. $ 659 $ 580 $ 634 $ 629 $ 511 ===== ===== ===== ===== ===== Total non-performing loans to total loans....... 0.05% 0.10% 0.11% 0.08% 0.08% Total non-performing assets to total assets..... 0.08% 0.08% 0.09% 0.10% 0.10%
Classified Assets. Federal regulations and the Association's policy require the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. At December 31, 1999 classified assets totaled $659,000, or 0.08% of total assets, and consisted of real estate owned property and seven conventional mortgage loans classifed as "Substandard". Allowance for Loan Losses, Investments in Real Estate and Real Estate Owned. The allowance for loan losses is established and maintained through a provision for loan losses based on management's evaluation of the risk inherent in the loan portfolio and the condition of the local economy in the Company's market area. Such evaluation, which includes a review of all loans on which full collectibility is not reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic and regulatory conditions, and other factors that warrant recognition of an adequate loan loss allowance. Management believes that the allowance for loan losses is adequate to cover losses inherent in the portfolio as of December 31, 1999. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic and other conditions differ substantially from the economic and other conditions in the assumptions used in making the initial determinations, such as a material increase in the balance of the loan portfolio. 12 In addition, the OTS and FDIC, as an integral part of their examination process, periodically review the allowance for loan losses and real estate owned and investments in real estate valuations. Such agencies may require the recognition of additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. As a result of the declines in local and regional real estate market values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of institutions by the OTS and the FDIC. While management believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the loan portfolio, will not request a material increase at that time in the allowance for loan losses, thereby negatively affecting the financial condition and earnings at such time. The following table sets forth the allowance for loan losses at the dates indicated.
For the Years Ended December 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- ------- ------- ------- ------- (in thousands) Allowance for loan losses: Balance at beginning of period................. $ 805 $ 715 $ 665 $ 575 $ 575 Charge-offs: Conventional mortgages..................... -- -- -- -- -- Residential construction................... -- -- -- -- -- Multi-family............................... -- -- -- -- -- Consumer................................... -- -- -- -- -- ----- ----- ----- ----- ----- Total charge-offs........................ -- -- -- -- -- Total recoveries............................... -- -- 5 -- -- Provision for (recovery of) loan losses........ 120 90 45 90 -- ----- ----- ----- ----- ----- Balance at end of period(1).................... $ 925 $ 805 $ 715 $ 665 $ 575 ===== ===== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period... --% --% --% --% --% Ratio of allowance for loan losses to total loans at the end of the period............... 0.17% 0.14% 0.12% 0.12% 0.13% Ratio of allowance for loan losses to non-performing assets at the end of the period............................. 1.40x 1.39x 1.13x 1.06x 1.13x
____________________________ (1) The total amount of the allowance for loan losses for each of the periods shown was allocated to mortgage loans. At the end of each reported period, mortgage loans represented in excess of 99.8% of total loans. 13 Investment Activities As a member of the FHLB System, the Association is required to maintain liquid assets at minimum levels which vary from time to time. The Association increases or decreases its liquid investments depending on the availability of funds, the comparative yields on liquid investments in relation to the return on loans and in response to its interest rate risk management. To meet liquidity obligations, federally chartered savings institutions have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans of federal funds and, subject to certain limits, corporate securities, commercial paper and mutual funds. The Association's liquid investments primarily consist of federal funds sold, U.S. Government securities, federal agency securities and interest-bearing deposits. Historically, the Association has maintained its liquid assets at levels well above the minimum regulatory requirements. At December 31, 1999, $74.5 million, or 9.1%, of the Association's total assets were invested in liquid assets. The Company's Investment Committee, which is appointed by the Chief Executive Officer, formulates the investment policy of the Company. The Company's Investment Committee reports all purchases and sales of investments to the Board of Directors. The policy of the Association is to invest funds among various categories of investments and maturities to meet the day-to-day, cyclical and long-term changes in assets and liabilities. In establishing its investment strategies, the Company considers its cash position, the condition of its loans, the stability of deposits, its capital position, its interest rate risk and other factors. Investment Securities. OTS guidelines regarding investment portfolio policy and accounting require insured institutions to categorize securities and certain other assets as held for "investment," "sale," or "trading." The Association's investment policy provides for "held for investment" and "available for sale" portfolios. Although the Association's investment policy allows that some investments and loans will qualify to be held-to-maturity, the policy allows the sale of investments in certain specific instances, such as when the quality of an asset deteriorates, or when regulatory changes require that an asset be disposed. At December 31, 1999, the Association had total investments of $233.4 million, of which $228.4 million was classified as available-for-sale and $5.0 million was classified as held to maturity. The $228.4 million investment classified as available-for-sale consisted of $199.1 million in municipal securities, $12.9 million in collateralized mortgage obligations ("CMO's"), $11.4 in FHLB stock and $5.0 in a FHLB bond. The $5.0 million investment classified as held to maturity consists of a U.S. government security which has a maximum term to maturity up to five years and Federal National Mortgage Association ("FNMA") stock. 14 The following table sets forth certain information regarding the carrying and market values of the portfolio of investment securities available-for-sale and held-to-maturity at the dates indicated:
At December 31, ----------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------------------------------------------------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value ---------------- ------------ ----------- --------- ---------- ----------- (In thousands) Investment securities: Municipal securities......................... $199,141 $184,768 $118,986 $118,986 $ -- $ -- U.S. Treasury securities..................... 4,985 5,167 9,976 10,677 9,969 10,485 Collateralized mortgage obligations.......... 12,902 12,761 17,691 17,691 15,902 15,902 FHLB bond.................................... 5,000 4,853 -- -- -- -- Other investments............................ 4 75 4 89 4 68 FHLB Stock................................... 11,400 11,400 9,000 9,000 5,148 5,148 -------- -------- -------- -------- ------- ------- Total investments.......................... $233,432 $219,024 $155,657 $156,443 $31,023 $31,603 ======== ======== ======== ======== ======= =======
The following table sets forth the carrying values, market values and average yields for the Association's available for sale and held to maturity investment portfolio (excluding $11.4 million in FHLB stock and $4,000 in FNMA stock) by maturity, call date or repricing date, whichever is first, at December 31, 1999, (dollars in thousand).
One Year or Less One to Five Years Five to Ten Years Total Securities ------------------- ------------------- ------------------- ----------------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Market Average Value Yield Value Yield Value Yield Value Value Yield -------- --------- -------- --------- -------- --------- -------- -------- --------- Investment Securities: Muncipal securties $ - -% $185,081 6.93% $14,060 7.07% $199,141 $184,768 6.94% U.S. treasury - - 4,985 7.25 - - - - securities Collateralized mortgage obligations 5,847 7.70 3,287 6.63 3,768 6.25 12,902 12,761 7.01 FHLB bond 5,000 8.00 - - - - 5,000 4,853 8.00
15 Sources of Funds General. The lending and investment activities are predominantly funded by savings deposits, borrowings, interest and principal payments on loans and other investments and loan origination fees. Deposits. Deposits serve as the predominant source of funds. The Association offers interest rates on deposits that are competitive in the Greater Pittsburgh market area to maintain a strong depositor base. Deposits consist of savings and club accounts, interest-bearing and non-interest-bearing demand deposit accounts, money market deposit accounts and certificates of deposit. The Association relies on its competitive pricing policies and customer service to maintain deposit growth. The Association has produced an overall increase in total deposits of 30.8%, from $391.4 million at December 31, 1995 to $511.9 million at December 31, 1999. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The following table presents the deposit activity for the periods indicated.
For the Years Ended December 31, ---------------------------------------------------------------- 1999 1998 1997 ----------------- ------------------ ------------------ (In thousands) Deposits........................................... $740,561 $701,925 $720,943 Withdrawals........................................ 737,891 716,621 725,033 -------- -------- -------- Net increase (decrease) before interest credited... 2,670 (14,696) (4,090) Interest credited.................................. 14,133 14,769 15,204 -------- -------- -------- Net increase in deposits........................... $ 16,803 $ 73 $ 11,114 ======== ======== ========
The following table indicates the amount of the certificates of deposit of $100,000 or more by the time remaining until maturity as of December 31, 1999.
Amount ------------------------ (In thousands) Maturity Period: Three months or less............................ $ 6,740 Over three through six months................... 5,267 Over six through 12 months...................... 15,045 Over 12 months.................................. 16,680 ------- Total........................................ $43,732 =======
16 The following table sets forth the distribution of the average daily balance of deposit accounts and borrowings for the periods indicated and the weighted average nominal interest rates on each category of deposits presented.
Year Ended December 31, -------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------------- ------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Average Nominal Average Nominal Average Nominal Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------- ---------- -------- --------- --------- --------- -------- --------- ------- (in Thousands) Money market and NOW deposits......................... $ 53,508 $ 1,404 2.62% $ 47,945 $ 1,147 2.39% $ 46,634 $1,092 2.34% Savings deposits.................. 85,151 3,021 3.55 82,136 2,480 3.02 78,316 2,288 2.92 Certificates of deposit........... 356,439 19,751 5.54 362,720 21,186 5.84 387,557 23,306 6.01 Borrowings........................ 230,335 12,886 5.59 142,481 8,031 5.64 102,649 5,643 5.50 -------- ------- ---- -------- ------- ---- -------- ------ ---- Total interest-bearing liabilities.................... $725,433 $37,062 5.11% $635,282 $32,844 5.17% $615,156 $32,329 5.26% ======== ======= ======== ======= ======== =======
The following table presents the amount of certificate accounts outstanding based upon original contractual periods to maturity, at December 31, 1999, and based upon contracted rates, at December 31, 1998 and 1997.
Period to Maturity from December 31, 1999 At December 31, ------------------------------------------------------------------------------------ --------------------- Less Than One to Two to Three to Four to Five to Total One Year Two Three Four Five Ten December Years Years Years Years Years 31, 1999 1998 1997 ------------------------------------------------------------------------------------ --------------------- (In thousands) Certificate Accounts: 3.00% to 5.50%....... $61,745 $124,221 $16,052 $ 9,821 $172 $ 5,740 $217,751 $175,279 $ 74,933 5.501% to 6.00%...... 26,225 33,803 16,763 20,602 208 22,106 119,707 123,361 156,885 6.001% to 6.50%...... 93 66 763 9,046 94 19,711 29,773 47,976 115,491 6.501% to 7.50%...... -- -- -- 34 -- 14,316 14,350 16,779 26,200 7.501% to 8.50%...... -- -- -- -- -- 2,750 2,750 2,806 2,855 8.501% to 9.50%...... -- -- -- -- -- 2,031 2,031 2,887 3,559 9.501% to 10.50%..... -- -- -- -- -- 2 2 298 281 ------- -------- ------- ------- ---- ------- -------- -------- -------- $88,063 $158,090 $33,578 $39,503 $474 $66,656 $386,364 $369,386 $380,204 ======= ======== ======= ======= ==== ======= ======== ======== ========
17 Borrowings Borrowings are used in conjunction with deposits in funding the operating and investment activity of the Company. At December 31, 1999, the Company had borrowings of $238.0 million. Of these borrowings, $228.0 million are held at the Association level and the remaining $10.0 is held at the Company level. Of the Association's borrowings, $70.0 million have a contractual maturity of five years at an interest rate of 5.61%. However, every six months the FHLB has the option to convert these borrowings to an adjustable rate based on the three month libor. If the FHLB elects to convert the borrowings to an adjustable rate, the borrowings can be repaid without penalty. In addition, $138.0 million in borrowings had a original contractual maturity of ten years. These borrowings carry a fixed interest rate for the first five years. On the fifth anniversary date the FHLB has the option to convert these borrowings to an adjustable rate base on three month libor. Again, if the FHLB elects to convert the borrowings to adjustable rates, the borrowing can be repaid without penalty. If the borrowings are not converted to an adjustable rate, the rate remains fixed at the current contractual rate for the remaining five years of the borrowings. The weighted average rate on these borrowings is 5.54%. The Association also has short-term borrowing of $20,000 with the FHLB which matures in January 2000 at a rate of 5.83%. The borrowings are secured by the assets of the Association. The Company has short-term borrowings of $10.0 million that matures in January 2000 at a weighted average rate of 6.94%. These borrowings are secured by the assets of the Company. Subsidiary Activities The Association does not maintain any subsidiaries. 18 REGULATION AND SUPERVISION General As a savings and loan holding company, the Company is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the OTS. The Association is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Association is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the SAIF managed by the FDIC. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Association's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the United States Congress, could have a material adverse impact on the Company, the Association and their operations. Certain of the regulatory requirements applicable to the Association and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Association and the Company. Holding Company Regulation The Company is a non-diversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as the Company was not generally restricted as to the types of business activities in which it may engage, provided that the Association continued to be a qualified thrift lender. See "Federal Savings Institution Regulation-QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, such as the Company, so long as the Association continues to comply with the QTL Test. Upon any nonsupervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separtate subsidiary) and would generally be limited to activities permissible for bank holding companies under 19 Section 4(c)(8) of the Association Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors. The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Association must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal association, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution's capital or assets. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk- based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. 20 The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks OTS believed are inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1999, the Association met each of its capital requirements. The following table presents the Association's capital position at December 31, 1999.
Excess Capital Actual Required (Deficiency) Actual Required --------------- --------------- ---------------- ---------------- ---------------- Tangible $74,838 $12,614 $62,224 8.90% 1.50% Core 74,838 33,638 41,200 8.90 4.00 (Leverage) Risk-based 75,763 28,176 47,587 21.51 8.00
Liquidation Account. In accordance with OTS conversion regulations, a liquidation account was established in an amount equal to the retained earnings of the Association as of June 30, 1995, which approximated $37.4 million. At December 31, 1999, the balance of the liquidation account was $10.2 million. In the unlikely event of a liquidation of the Association, eligible account holders would be entitled to receive distributions of any assets remaining after payment of all creditors' claims, but before any distributions are made to the Association's stockholders, equal to their proportionate interests at that time in the liquidation account. Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of 21 core capital to total assets of less than 4% (3% or less for instituitions with highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings instituition that has a tangible capital to asset ratio equal to or less than 2% is deemed bo be "critically undercapitalized." Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. Deposits of the Association are presently insured by the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980's by the Financing Corporation ("FICO") to recapitalized the predecessor to the SAIF. During 1999, FICO payments for SAIF members approximated 6.10 basis points, while Bank Insurance Fund ("BIF") members paid 1.2 basis points. By law, there will be equal showing of FICO payments between SAIF and BIF members on the earlier of January 1, 2000 or the date the SAIF and BIF are merged. The Association's assessment rate for fiscal 1999 was 6.5 basis points and the premium paid for this period was $300,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Association. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Association does not know of any practice, condition or violation that might lead to termination of deposit insurance. Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan 22 or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by readily-marketable collateral. At December 31, 1999, the Association's limit on loans to one borrower was $10.8 million and the Association's largest aggregate outstanding balance of loans to one borrower was $417,000. QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1999, the Association maintained 75.6% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, such as cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. The rule, effective in 1998, establishes three tiers of institutions based primarily on an institution's capital level. An institution that exceeded all capital requirements before and after a proposed capital distribution ("Tier 1 Association") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half the excess capital over its capital requirements at the beginning of the calendar year, or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. At December 31, 1999, the Association was a Tier I Association. Effective April 1, 1999, the OTS's capital distribution regulation was changed. Under the new regulation, an application to and the prior approval of the OTS will be required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (e.g., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. If an application is not required, the institution must still provide prior notice to OTS of the capital distribution. In the event the Association's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Association's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. 23 Liquidity. The Association is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 4%, but may be changed from time to time by the OTS to any amount within the range of 4% to 10%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Association's liquidity ratio for 1999 was 8.8%, which exceeded the applicable requirements. The Association has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi- annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Association's latest quarterly thrift financial report. The assessments paid by the Association for the fiscal year ended December 31, 1999 totalled $145,000. Transactions with Related Parties. The Association's authority to engage in transactions with related parties or "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Association's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law also limits both the individual and aggregate amount of loans the Association may make to insiders based, in part, on the Association's capital position and requires certain board approval procedures to be followed. 24 Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that an institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard. Federal Home Loan Bank System The Association is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Association, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. The Association was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 1999 of $11.4 million. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts from the late 1980's and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Association's net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership. 25 Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $44.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts aggregating greater than $44.3 million, the reserve requirement is $1.329 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Association complies with the foregoing requirements. FEDERAL AND STATE TAXATION Federal Taxation General. The Company and the Association report their income on a consolidated basis and the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Association's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Association or the Company. The Association has not been audited by the IRS during the last five years. For its 1999 taxable year, the Company is subject to a maximum federal income tax rate of 34%. Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be improved) under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience Method. The reserve for non-qualifying loans was computed using the Experience Method. The Small Business Job Protection Act of 1996 (the "1996 Act"), which was enacted on August 20, 1996, requires savings institutions to recapture (i.e., take into income) certain portions of their accumulated bad debt reserves. The 1996 Act repeals the reserve method of accounting for bad debts effective for tax years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the Experience Method applicable to such institutions, while thrift institutions that are treated as large banks (those generally exceeding $500 million in assets) are required to use only the specific charge-off method. Thus, the PTI method of accounting for bad debts is no longer available for any financial institution. 26 A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the IRS. Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six-taxable period beginning with the first taxable year after 1995, subject to a two-year suspension if the "residential loan requirement" is satisfied. Under the residential loan requirement provision, the recapture required by the 1996 Act will be suspended for each of two successive taxable years, beginning with the Association's taxable year of 1998, in which the Association originates a minimum of certain residential loans based upon the average of the principal amounts of such loans made by the Association during its six taxable years preceding its current taxable year. Under the 1996 Act, for its current and future taxable years, the Association is not permitted to make additions to its tax bad debt reserves. In addition, the Association is required to recapture (i.e., take into income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. As a result of such recapture, the Association will incur an additional tax liability of approximately $1.2 million over six years beginning with the 1998 tax year. Distributions. Under the 1996 Act, if the Association makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from the Association's unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from the Association's supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Association's income. Non-dividend distributions include distributions in excess of the Association's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Association's current or accumulated earnings and profits will not be so included in the Association's income. The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Association makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Association does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the Experience Method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an 27 amount equal to 75% of the amount by which the Association's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Association as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Association will not file a consolidated tax return, except that if the Company owns more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. State and Local Taxation The Association is subject to the Mutual Thrift Institutions Tax of the Commonwealth of Pennsylvania based on the Association's financial net income determined in accordance with generally accepted accounting principles with certain adjustments. The tax rate under the Mutual Thrift Institutions Tax is 11.5%. Interest on state and federal obligations is excluded from net income. An allocable portion of net interest expense incurred to carry the obligations is disallowed as a deduction. Three year carryforwards of losses are allowed. The Company is subject to the Capital Stock Tax of the Commonwealth of Pennsylvania and the Franchise Tax of the state of Delaware. Personnel As of December 31, 1999, the Association had 52 full-time employees and 10 part-time employees. The employees are not represented by a collective bargaining unit, and the Association considers its relationship with its employees to be good. Year 2000 Compliance As of March 1, 2000, the Company has experienced no disruptions or problems regarding the Year 2000 rollover. As part of the Company's Year 2000 plan, on January 1, 2000, the Company tested and sampled internal systems, including it primary third-party processor, telecommunications systems, automated teller machines and related third party vendors supporting these machines, various third party software applications and the Company's ability to interface with its corespondent banks, such as the FHLB. All testing completed on January 1, 2000 indicated all systems were operating as normal. Through March 1, 2000, all of the Company's internal hardware and software continue to operate as normal, and to date, to the Company's knowledge, all vendors utilized by the company in its daily operations are operating normally and have not indicated any Y2K related problems. The Company will continue to monitor and oversee all internal operations and be in contact with its vendors regarding Y2K related issues. Based on the successful transition through the January 2000 rollover period and the previously conducted testing, the Company does not anticipate any significant Y2K problems to arise. The Company's expenditures for the Y2K effort total approximately $50,000. 28 Item 2. Properties The Company conducts its business by maintaining an office at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware 19801. The Association conducts its business through its main office located at 532 Lincoln Avenue, Pittsburgh, Pennsylvania 15202 and six full-service branch offices, all of which are located in Allegheny County. Three of the Association's branch offices are leased. Loan originations are processed at the administrative office. The Association believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Association and the Company. Item 3. Legal Proceedings Neither the Company nor its subsidiary are involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the financial condition and results of the operations of the Association. Item 4. Submission of Matters to a Vote of Security Holders See the proxy for submission of matters to a vote of security holders. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information relating to the market for Registrant's common equity and related stockholder matters appears under "Shareholder Information" on page 48 in the Registrant's 1999 Annual Report to Stockholders and is incorporated herein by reference. Information relating to the dividend restrictions for Registrant's common stock appears under Note 12 to the "Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997" on pages 33 and 34 in the Registrant's 1999 Annual Report to stockholders and is incorporated herein by reference. Item 6. Selected Financial Data The above-captioned information appears under "Selected Financial and Other Data of the Company" in the Registrant's 1999 Annual Report to Stockholders on pages 2 and 3 is incorporated herein by reference. 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1999 Annual Report to Stockholders on pages 8 through 19 and is incorporated herein by reference. Item 7.a. Quantitative and Qualitative Disclosure About Market Risks The above-captioned information appears under the heading "Interest Rate Sensitivity" in the registrant's 1999 Annual Report to Stockholders on pages 10 and 11 is incorporated herein by reference. For 1998, it is as follows: Interest Rate Sensitivity Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that same time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, in a rising interest rate environment, an institution with a positive gap would be in a better position to invest in higher yielding assets, which would result in the yield on its assets increasing at a pace closer to the cost of its interest-bearing liabilities, than would be the case if it has a negative gap. During a period of falling interest rates, an institution with a positive gap would tend to have its assets repricing at a faster rate than one with a negative gap, which would tend to restrain the growth of its net interest income. The following table sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1998 which are anticipated to reprice or mature in each of the future time periods shown. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to (i) repricing or (ii) the contractual terms of the asset or liability adjusted for historical prepayment rates. The prepayment rates utilized are based on the historical prepayment rates experienced by the Company, which management believes to be reasonable. While a conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings. It makes no presumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. 30
AT DECEMBER 31, 1998 ---------------------------------------------------------------------------------------- More Than More Than Six More Than One Three Months Three Months Months to Year to Three or Less to Six Months Twelve Months Years ---------------------------------------------------------------------------------------- (Dollars in thousands) INTEREST EARNING ASSETS: Real Estate Loans: ARM Loans $ 2,246 $ 371 $ 1,541 $ 13,706 Fixed Rates Loans 7,853 7,685 15,370 58,062 Residential Construction Loans - - - - Multi-Family 1 - - 57 Second Mortgage Loans 1,047 - - - Consumer Loans 895 - - 4 Investment securities 60,840 - - - FHLB Stock - 175 5,348 2,560 --------- - - - --------- --------- --------- Total Interest Earning Assets 72,882 8,231 22,259 74,389 INTEREST BEARING LIABILITIES: Passbook, Club and Other Accounts 2,575 2,575 5,150 16,478 Money Market and NOW Accounts 2,737 2,737 5,474 15,004 Certificate Accounts 72,172 73,154 91,132 89,252 Borrowings - - - - Advances by Borrowers for Taxes and Insurance 11,354 - - - --------- --------- ---------- --------- Total Interest Bearing Liabilities 88,838 78,466 101,756 120,734 --------- --------- ---------- --------- Interest Sensitivity Gap $ (15,956) $ (70,235) $ (79,497) $ (46,345) ========= ========= ========== ========= Cumulative Interest Sensitivity Gap $ (15,956) $ (86,191) $(165,688) $(212,033) ========= ========= ========== ========= Cumulative Interest Sensitivity Gap as a Percentage of Total Assets (2.08%) (11.23%) (21.58%) (27.62%) Cumulative Net Interest Earning Assets as a Percentage of Cumulative Interest Bearing Liabilities 82.04% 48.48% 38.42% 45.60% AT DECEMBER 31, 1998 ---------------------------------------------------------------------------------------- More Than More Than Three Years to Five Years to More Than Ten Five Years Ten Years Years Total ---------------------------------------------------------------------------------------- (Dollars in thousands) INTEREST EARNING ASSETS: Real Estate Loans: ARM Loans $ 1,793 $ - $ - $ 19,657 Fixed Rates Loans 53,177 154,013 216,089 512,249 Residential Construction Loans - - 7,570 7,570 Multi-Family 136 261 196 651 Second Mortgage Loans 2,681 780 - 4,508 Consumer Loans - - - 899 Investment securities - - - - FHLB Stock 97,717 34,690 4 201,334 - - 9,000 9,000 ---------- ---------- -------- --------- Total Interest Earning Assets 155,504 189,744 232,859 755,868 INTEREST BEARING LIABILITIES: Passbook, Club and Other Accounts 12,187 18,330 16,283 73,578 Money Market and NOW Accounts 9,193 10,866 6,153 52,164 Certificate Accounts 26,498 17,178 - 369,386 Borrowings 70,000 110,000 - 180,000 Advances by Borrowers for Taxes and Insurance - - - 11,354 ---------- ---------- -------- --------- Total Interest Bearing Liabilities 117,878 156,374 22,436 686,482 ---------- ---------- -------- --------- Interest Sensitivity Gap $ 37,626 $ 33,370 $210,423 $ 69,386 ========== ========== ======== ======== Cumulative Interest Sensitivity Gap $(174,407) $(141,037) $ 69,386 $ 69,386 ========== ========== ======== ======== Cumulative Interest Sensitivity Gap as a Percentage of Total Assets (22.72%) (18.37%) 9.04% 9.04% Cumulative Net Interest Earning Assets as a Percentage of Cumulative Interest Bearing Liabilities 65.65% 78.76% 110.11% 110.11%
31 Net Portfolio Value. The Company's interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally and by the OTS. Using data from the Association's quarterly Thrift Financial Reports, the OTS measures the Association's interest rate risk by modeling the change in net portfolio value ("NPV") over a variety of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. A NPV ratio, in any interest rate scenario, is defined as the NPV in that rate scenario divided by the market value of assets in the same scenario. The interest rate risk measures used by the OTS include an interest rate risk "Exposure Measure" or "post-shock" NPV ratio and a "Sensitivity Measure." A low "post-shock" NPV ratio indicates greater exposure to interest rate risk. Greater exposure can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The Sensitivity Measure is the decline in the NPV ratio, in basis points, caused by a 200 basis point increase or decrease in rates, whichever produces a larger decline. As of December 31, 1998, the Association's NPV, as measured by the OTS, was $83.6 million or 10.56% of the market value of assets. Following a 200 basis point increase in interest rates, the Association's "post-shock" NPV, which provides a larger decline than a 200 point decrease, was $68.9 million, or 8.37% of the market value of assets. The change in the NPV ratio or the Association's Sensitivity Measure was -219 basis points. Under OTS capital requirements which have not yet been fully implemented, the decline in the NPV ratio at December 31, 1998 would reflect an above average interest rate risk. If the regulations are finalized as proposed, the Company would remain in compliance with the fully phased in capital requirements. Management reviews the quarterly OTS measurements and compares them to evaluations produced through internally generated simulation models. These measures are used in conjunction with NPV measures to identify excessive interest rate risk. The above-captioned information appears under the heading "Interest Rate Sensitivity" in the registrant's 1999 Annual Report to Stockholders on pages 10 and 11 is incorporated herein by reference. For 1998, it is as follows: Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements of First Bell Bancorp, Inc. and its subsidiary, together with the report thereon by Deloitte & Touche LLP appears in the Registrant's 1999 Annual Report to Stockholders on pages 21 through 45 and are incorporated herein by reference. Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2000, at pages 4 through 6. Item 11. Executive Compensation The information relating to directors' compensation and executives' compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2000, at pages 7 through 14 (excluding the Compensation Committee Report and Stock Performance Graph). Item 12. Security Ownership of Certain Beneficial Owners and Management The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2000, at pages 4 through 6. 32 Item 13. Certain Relationships and Related Transactions The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2000, at page 14. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1999 Annual Report to Stockholders.
PAGE Independent Auditors Report.................................... 21 Consolidated Balance Sheets for the December 31, 1999 and 1998................................... 22 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997................. 23 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 1999, 1998 and 1997................. 24 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997......... 25 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................. 26 Notes to Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997................. 27-45
The remaining information appearing in the 1999 Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 33 (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Certificate of Incorporation of First Bell Bancorp, Inc.* 3.2 Bylaws of First Bell Bancorp, Inc.* 4.0 Stock Certificate of First Bell Bancorp, Inc.* __________________________________ * Incorporated herein by reference into this document from the Exhibits to the Form S-1, Registration Statement, originally filed on November 9, 1994, as amended and declared effective on May 9, 1995, Registration No. 33-86160. 10.1 First Bell Bancorp, Inc. 1995 Master Stock Option Plan** 10.2 Bell Federal Savings and Loan Association of Bellevue Master Stock Compensation Plan** 10.5 Form of Bell Federal Savings and Loan Association of Bellevue Supplemental Executive Retirement Plan* 10.6 Employment Agreement between First Bell Bancorp, Inc. and certain executive officers, including Messrs. Eckert and Hinds (filed herewith) 10.7 Employment Agreement between Bell Federal Savings and Loan Association of Bellevue and certain executive officers, including Messrs. Eckert and Hinds (filed herewith) 11.0 Computation of earnings per share (filed herewith) 13.0 Portions of the 1999 Annual Report to Stockholders (filed herewith) 23.0 Consent of Independent Accountant (filed herewith) 27.0 Financial Data Schedule (filed herewith) 99.0 Proxy Statement for 2000 Annual Meeting of Stockholders to be held on April 24, 2000 and previously filed on March 17, 2000 is herein incorporated by reference __________________________________ ** Incorporated herein by reference into this document from the Exhibits to the Form S-1 Registration Statement originally filed on November 9, 1994 as amended and declared effective on May 9, 1999, Registration No. 33-86160. (b) Reports on Form 8-K None. 34 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 30, 2000 By: /s/ Albert H. Eckert II ------------------------ ---------------------------------------- Albert H. Eckert II, President, Chief Executive Officer and Director Date: March 30, 2000 By: /s/ Jeffrey M. Hinds ------------------------ ----------------------------------------- Jeffrey M. Hinds Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. /s/ Albert H. Eckert, II President, Chief Executive March 30, 2000 - -------------------------- Officer and Director -------------- Albert H. Eckert, II /s/ Jeffrey M. Hinds Executive Vice President, March 30, 2000 - -------------------------- Chief Financial Officer -------------- Jeffrey M. Hinds and Director /s/ David F. Figgins Vice President and March 30, 2000 - -------------------------- Director -------------- David F. Figgins /s/ Thomas J. Jackson, Jr. Director March 30, 2000 - -------------------------- -------------- Thomas J. Jackson, Jr. /s/ Robert C. Baierl Secretary and Director March 30, 2000 - -------------------------- -------------- Robert C. Baierl /s/ William S. McMinn Vice President and March 30, 2000 - ------------------------- Director -------------- William S. McMinn 35 /s/ Peter E. Reinert Director March 30, 2000 - --------------------------- -------------- Peter E. Reinert /s/ Jack W. Schweiger Director March 30, 2000 - --------------------------- -------------- Jack W. Schweiger /s/ Theodore R. Dixon Director March 30, 2000 - --------------------------- -------------- Theodore R. Dixon 36 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 FIRST BELL BANCORP, INC. COMPUTATION OF EARNINGS PER SHARE DECEMBER 31, 1999
TWELVE TWELVE MONTHS MONTHS ENDED ENDED 12/31/99 12/31/99 -------- -------- BASIC FULLY DILUTED Net income applicable to common stock $8,041,756 $8,041,756 ---------- ---------- Weighted average shares outstanding 5,043,325 5,043,325 Add: Option common stock equivalents - 138,439 Less: MRP shares 242,384 242,384 Add: Granted MRP shares - 64,714 ---------- ---------- Total Shares 4,800,941 5,004,096 ========== ========== Earnings per share $ 1.68 $ 1.61 ========== ==========
EX-13 3 ANNUAL REPORT [LOGO] First Bell Bancorp, Inc. - -------------------------------------------------------------------------------- 1999 ANNUAL REPORT Table of Contents - -------------------------------------------------------------------------------- Selected Financial and Other Data of the Company 2 - -------------------------------------------------------------- Letter to Our Shareholders 4 - -------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - -------------------------------------------------------------- Management's Report on the Internal Control Structure and Compliance with Laws and Regulations 20 - -------------------------------------------------------------- Independent Auditors' Report 21 - -------------------------------------------------------------- Consolidated Financial Statements 22 - -------------------------------------------------------------- Notes to Consolidatated Financial Statements 27 - -------------------------------------------------------------- Executive Management and Directors 46 - -------------------------------------------------------------- Shareholder Information 48 - -------------------------------------------------------------- Office Locations 49 - --------------------------------------------------------------
- -------------------------------------------------------------------------------- 1 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Selected Financial and Other Data of the Company - -------------------------------------------------------------------------------- The following table sets forth certain summary historical financial informa- tion concerning the financial position of the Company for the period and at the dates indicated. The financial data is derived in part from, and should be read in conjunction with, the consolidated financial statements and related notes contained elsewhere herein.
At December 31 -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands) Financial Condition Data: Total assets...................... $816,122 $767,606 $675,684 $656,183 $520,842 Investments, at cost.............. 4,989 9,980 9,973 14,964 19,953 Investments, at fair value........ 202,382 136,677 15,902 -- -- Cash and cash equivalents......... 20,468 21,543 24,523 26,406 23,722 Total loans receivable, net....... 532,292 545,535 579,394 530,815 415,569 Mortgage-backed securities, at fair value....................... -- -- 31,855 -- -- Deposits.......................... 511,931 495,128 495,055 483,941 391,411 Borrowings........................ 238,000 180,000 90,000 70,000 -- Stockholders' equity.............. 54,518 73,902 72,983 86,433 118,482 Year Ended December 31 -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands except per share amounts) Selected Operating Data: Interest income................... $ 52,090 $ 49,649 $ 49,226 $ 41,007 $ 33,831 Interest expense.................. 37,061 32,843 32,329 22,050 18,432 -------- -------- -------- -------- -------- Net interest income.............. 15,029 16,806 16,897 18,957 15,399 Provision for loan losses........ 120 90 45 90 -- -------- -------- -------- -------- -------- Net interest income after provision for loan losses....... 14,909 16,716 16,852 18,867 15,399 Total other income................ 598 643 829 1,198 824 -------- -------- -------- -------- -------- Total other expenses.............. 6,116 5,643 5,060 8,177 4,945 -------- -------- -------- -------- -------- Income before provision for income taxes............................ 9,391 11,716 12,621 11,888 11,278 -------- -------- -------- -------- -------- Provision for income taxes........ 1,349 3,878 5,046 4,485 4,345 -------- -------- -------- -------- -------- Net income (4).................... $ 8,042 $ 7,838 $ 7,575 $ 7,403 $ 6,933 ======== ======== ======== ======== ======== Earnings per share Basic (4)........................ $1.68 $1.41 $1.29 $1.05 $0.52 ======== ======== ======== ======== ======== Diluted (4)...................... $1.61 $1.35 $1.23 $1.02 $0.52 ======== ======== ======== ======== ======== Dividends declared per common shares........................... $0.40 $0.40 $0.40 $0.37 -- ======== ======== ======== ======== ========
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At or For the Year Ended December 31, ------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Selected Financial Ratios and Other Data: Book value per share................. $ 10.51 $ 12.11 $ 11.21 $ 11.14 $ 13.78 Stockholders' equity to assets at period end.......................... 6.68% 9.63% 10.80% 13.17% 22.75% Return on average assets (net income divided by average total assets) (4). 0.99 1.09 1.08 1.30 1.48 Return on average equity (net income divided by average equity) (4)...... 12.50 10.36 10.25 6.75 8.38 Stockholders' equity to assets ratio (average stockholders' equity divided by average total assets).... 7.96 10.50 10.55 19.26 17.64 Dividend payout ratio................ 23.04 28.48 31.04 36.43 -- Average interest rate spread (1)(5).. 1.91 1.99 1.90 2.45 2.52 Net interest margin (2)(5)........... 2.36 2.53 2.45 3.38 3.35 Other income to average assets....... 0.07 0.09 0.11 0.21 0.18 Efficiency ratio (3)................. 31.50 30.34 28.95 29.07 30.48 Other expenses to average assets (4). 0.76 0.78 0.72 1.44 1.05 Non-performing assets to total assets.............................. 0.08 0.08 0.09 0.10 0.10 Non-performing loans to total loans.. 0.05 0.09 0.11 0.08 0.08 Allowance for loan losses to total loans............................... 0.17 0.15 0.12 0.13 0.13 Allowance for loan losses to non- performing assets................... 1.40x 1.39x 1.13x 1.06x 1.13x Net interest income to other expenses (5)................................. 3.08x 3.18x 3.34x 2.32x 3.11x Net interest income after provision for loan losses to total other expenses (5)........................ 3.06x 3.17x 3.33x 2.31x 3.11x Average interest-earning assets to average interest-bearing liabilities......................... 1.09x 1.12x 1.12x 1.24x 1.21x Number of: Depositor accounts.................. 54,257 53,579 53,628 53,188 47,409 Full-service customer service facilities......................... 7 7 7 7 7
- ------- (1) The interest rate spread represents the difference between the weighted- average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities. (2) The net interest margin represents net interest income as a percentage of average interest-earning assets. (3) The efficiency ratio represents the ratio of recurring other expenses to recurring other income and net interest income. (4) Without giving effect to the one-time special Savings Association Insurance Fund ("SAIF") assessment of $2.5 million, or $1.5 million after tax, to recapitalize the SAIF recorded in September, 1996 and the return of capital of $20.7 million paid on December 31, 1996, net income would have been $8.9 million, the basic and diluted earnings per share would have been $1.27 and $1.23, respectively, other expenses to average assets would have been 1.00%, return on average assets would have been 1.57% and return on average equity would have been 8.01%. (5) Ratios are based on net interest income determined with tax equivalent rates of return for non-taxable investment securities. - -------------------------------------------------------------------------------- 3 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT To Our Shareholders - -------------------------------------------------------------------------------- In a challenging environment, First Bell Bancorp, Inc., the parent corporation of Bell Federal Sav- ings and Loan Association of Bellevue, posted an- other year of successful financial performance. Net income rose to $8.04 million for the year, up from $7.84 million in 1998. Earnings per share were up to $1.61, a 19.3% increase over the previ- ous year's $1.35. Return on average equity im- proved substantially, to 12.50%, from the preced- ing year's 10.36%. Our efficiency ratio remained one of the best in the country with an overall 31.5% for the year. We are proud to have accomplished these results during a year when most financial institutions were struggling to attract investor attention. Stock prices for financial institutions experi- enced severe downward pressure. Although First Bell was not immune from the negative market envi- ronment, our strong financial results helped us to outperform our peer group. In these circumstances, we have worked even harder to reinforce shareholder value. Once again, therefore, we engaged in two large share repur- chase programs, programs we consider a sound long- term investment. We have continued to work to diversify our loan portfolio by increasing our efforts to originate adjustable rate mortgage loans and home equity loans. In 1999, we increased the dollar balance of home equity loans by 144.3% (to $11.0 million from $4.5 million). Our adjustable rate mortgage port- folio increased by 14.5% as we were proactive in marketing these products. While we have naturally paid close attention to the earnings side of our ledger, we have sustained our careful management of expenses. We are partic- ularly pleased with our record in credit manage- ment, and in 1999, we lowered our ratio of non- performing loans to total loans from a 1998 level that was already among the best in the industry. We remain deeply committed to the principle of prudent expense control and are proud of the rec- ognition it has received, some of which is de- tailed on the following pages. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- In order to attract business in our highly com- petitive world, we have given new emphasis to ad- vertising and marketing. Most recently, we have: . expanded an energetic marketing campaign to new media; . strived to make our products and services available to the public through a variety of outlets; . broadened our investment in technological access for our customers, and will continue to examine new means of doing so. Our shareholders, who are in numerous cases also our customers, have demonstrated extraordinary loyalty. Our staff has worked hard, and imagina- tively, to deal with competitive and market chal- lenges. Let me express, on behalf of our entire management team, the gratitude we owe them all. Sincerely, /s/ Albert H. Eckert, II Albert H. Eckert, II President and Chief Executive Officer - -------------------------------------------------------------------------------- 5 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Adaptation with Purpose--Business in a New Century - -------------------------------------------------------------------------------- Every business must learn to cope with change; in the 21st century, there is good reason to believe, change will be more rapid and broader than ever before. Yet response to change must be carefully chosen; adaptation must be thoughtful and fo- cused-- intended not to merely sidestep some imme- diate threat, but to take an institution in a cer- tain strategic direction. At First Bell Bancorp, Inc., we have certainly engaged in more than our share of adaptation to change since we went public in 1995. But we be- lieve that we have remained purposeful, with a clear vision of who we are, how we can best serve customers, and grow value for our shareholders. It is, of course, one thing to express this be- lief--and entirely another to have the marketplace agree. Thus it was with particular pride that we read the report of ThriftINVESTOR, a highly re- spected publication dedicated to reporting on and evaluating the thrift industry. In its July 1999 issue, ThriftINVESTOR ranked the leading 100 pub- licly traded thrift institutions nationwide. First Bell Bancorp, Inc., ranked seventh, well above many institutions with vastly greater assets. In addition, we ranked third among the same popula- tion in efficiency ratio, measured by dividing net interest income plus noninterest income into non- interest expense. Increasingly, analysts are per- suaded that the winners in our industry will also be among the lowest-cost providers, and we are de- termined to guard our standing in that group. ...we think low-multiple companies such as FirstBell will become very attractive to value investors with a long-term perspective on the opportunities offered by community banks spe- cializing in the delivery of basic banking prod- ucts... Lehman Brothers March 2000 - -------------------------------------------------------------------------------- 6 - ------------------------------------------------------------------------------- Any retail institution today must open new tech- nological avenues to its customers. We continue to invest in broadening the channels we have already established. In 1999, we put in place a 24-hour telephone banking system which unquestionably im- proved both the efficiency and quality of our cus- tomer relations. But that system was only a pro- logue to the Internet banking program planned for 2000. Once implemented, the program will permit online transfer of accounts, deposits and with- drawals. During the course of the year, we will explore the possibility of paying bills online. In addition, we remain linked to the Freedom ATM Al- liance network of more than 30 financial institu- tions and 200 ATM machines. Our customers will continue to use these ATMs without surcharges. Keeping our message before the public has been another area of investment. We have expanded our advertising campaigns in newspapers throughout metropolitan Pittsburgh and begun marketing ef- forts on area radio and television alike. When combined with our ongoing efforts in cross sell- ing--alerting our customers to our full array of products rather than simply the one in which they expressed initial interest--we believe that inten- sified marketing has produced solid results. The challenging market conditions of 1999 have kept the emphasis upon adaptation and innovation. But they have not panicked us into changing our institutional identity. Far from it. We will man- age rigorously, and we will manage creatively. We will stay close to our customer base and our shareholder base. With their support, we will con- tinue to refine ourselves to take advantage of growth opportunities. - ------------------------------------------------------------------------------- 7 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- General First Bell Bancorp, Inc. (the "Company" or "First Bell") is a Delaware corporation organized by the Board of Directors of Bell Federal Savings and Loan Association of Bellevue ("the Association"). The only significant assets of the Company are the capital stock of the Association and the Company's loan to the Association's Employee Stock Ownership Plan ("ESOP"). Currently, the Company does not transact any material business other than through its subsidiary, the Association. All references to the Company include the Association unless otherwise indicated. The Company operates a traditional savings and loan institution and seeks to achieve profitability while maintaining a strong capital and liquidity posi- tion. As a community oriented savings and loan, the Company's primary invest- ment is in one- to four-family residential mortgage loans and investment secu- rities. The Company's primary sources of funds are from retail deposit accounts and borrowings. The Company's results of operations are dependent primarily on net interest income, which is the difference between the income earned on its loan and investment securities portfolios, and its cost of funds, consisting primarily of the interest paid on its deposits and borrowings. The Company's results of operations are affected by its provision for loan losses, non-inter- est expenses and by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government poli- cies may materially impact the Company. Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this Annual Report includes certain forward looking statements based on current management expectations. Examples of this forward looking information can be found in, but are not limited to, the: "President's Letter to Shareholders", "Management's Discussion and Analy- sis of Financial Condition and Results of Operations", "Asset Quality", "Interest Rate Sensitivity Analysis", and in the "Notes to Consolidated Finan- cial Statements for the Years Ended December 31, 1999, 1998 and 1997", "Note 5-- Investment Securities Available for Sale", "Note 17--Commitments and Con- tingencies" and "Note 18--Fair Values of Financial Instruments". The Company's actual results could differ materially from those management expectations. Fac- tors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, leg- islative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rate, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in de- tail in Item 1, "Business" of the Company's 1999 10-K. Residential Mortgage Lending and Investment Securities The Company has emphasized originating conventional one- to four-family resi- dential mortgage loans for its portfolio in its primary market area, the greater Pittsburgh metropolitan area. The Company originates 15 and 30 year, fixed-rate and adjustable rate mortgage loans. The Company also originates res- idential construction loans and home equity installment and line of credit loans on one- to four-family properties. In recent years, the Company has placed more emphasis on its investment portfolio to support the Company's con- tinued growth. The investment portfolio is comprised of Bank Qualified Munici- pal Securities, Collateralized Mortgage Obligations ("CMO's"), Treasury Securi- ties and in 1999, a Federal Home Loan Bank ("FHLB") Bond. Sources of Funding Deposit growth has been the integral source of funds and the means of growth for the Company. In this regard, management has emphasized providing an in- creased level of service to its customers in its local market areas in order to retain and develop deposit relationships with such customers. In 1998, the Com- pany instituted a sales training program to improve the product knowledge of our customer service representatives and to develop their skills in recognizing and responding to customer needs. In 1999 and 1998, First Bell placed consider- able emphasis on core deposit relationships, consisting of money market, NOW, passbook, club and statement savings accounts. These accounts - -------------------------------------------------------------------------------- 8 - ------------------------------------------------------------------------------- tend to be stable and lower cost than other types of deposits. Certificates of deposit are offered with terms ranging from three months to ten years and are priced at competitive rates. As of December 31, 1999, the Company had outstanding borrowings from the FHLB in the amount of $228.0 million and a bank line of credit of $10.0 million. These borrowings were used to fund the investment portfolio and to help manage the Company's equity position and the interest rate risk position. Asset Quality As a result of the Company's long-term policy of originating loans secured by one- to four-family, owner-occupied, primary residences, management believes the Company has maintained high asset quality. The Company has established a general loss allowance to provide for losses in its portfolio. The provision for loan losses is $925,000 or 140.4% of total non-performing assets at December 31, 1999. The allowance ratio is based on management's assessment of prospective national and local economic conditions, the regulatory environment and inherent risks in the portfolio, not to specific problem loans existing in the portfolio. Management believes that the current level of reserves is ade- quate. However, the balance of reserves necessary can be greatly influenced by regulatory changes and economic conditions. Therefore, the level of future re- serves and the related effect on net income cannot be assured. Operating Expenses The Company's non-interest expenses principally consist of compensation and employee benefits, federal deposit insurance premiums, occupancy and equipment expenses and other general and administrative expenses. The ratio of other expenses to average assets was 0.76%, 0.78% and 0.72% for the years ended December 31, 1999, 1998 and 1997, respectively. Low operating costs are maintained by managing and monitoring overhead costs, primarily through controlling the growth in personnel. At December 31, 1999, the Company's seven offices and $816.1 million in assets were operated by a total of fifty two full-time employees and ten part-time employees, resulting in an average of $13.2 million in assets per employee. Liquidity and Capital Resources The Company is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percent- age of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement was 4% for fiscal 1999, but is subject to change from time to time by the Office of Thrift Supervision ("OTS") to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Company's liquidity ratio for 1999 was 8.8%, which exceeded the applicable requirements. The Company has never been subject to monetary penalties for failure to meet its liquidity requirements. The Company's sources of funds are deposits, borrowings and principal and in- terest payments on loans and investment securities. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are strongly influenced by changes in general interest rates, economic conditions and competition. At December 31, 1999, loan commitments were $6.4 million. The Association an- ticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1999 totaled $265.0 million. Man- agement believes that a significant portion of such deposits will remain with the Association. As a member of the FHLB, the Association has the ability to borrow from the FHLB, if necessary. As of December 31, 1999, the Association had $228.0 million in outstanding borrowings. The most recent FHLB report had the Association's additional borrowing capacity from the FHLB at $193.4 mil- lion. Impact of Inflation and Changing Prices The Financial Statements and Notes thereto presented herein have been pre- pared in accordance with Generally Accepted Accounting Principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike indus- trial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. In- terest rates do not necessarily move in the same direction or to the same ex- tent as the price of goods and services. - ------------------------------------------------------------------------------- 9 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- Results of the Preparation for the Year 2000 The Company's computer system property handled the date change to January 1, 2000. The Company did not experience any interruption in its operations as a result of the millenium change. Expenses incurred in preparation for the date change were not material to the financial results of the Company. Interest Rate Sensitivity The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive. The Company's interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally and by the OTS. The Company's interest rate risk is measured by modeling the change in net portfolio value ("NPV") and net interest income over a variety of interest rate scenarios and, to a lesser extent, through GAP analysis. The OTS calculates interest rate risk through modeling. All calculations have limitations because of inherent assumptions which must be made with respect to market values, discount rates, prepayments, the interest rate sensitivity of the assets and liabilities to changes in base interest rates. Other assumptions are made with respect to; the value of options imbedded in the asset or liabil- ity, the likelihood that the option will be exercised and the extent to which customers elect to make prepayments on loans or deposits or withdrawals from savings accounts. Management bases their assumptions on historical data accumu- lated over a variety of interest rate scenarios. As of December 31, 1999, the Association's NPV, as measured by the OTS, was $69.8 million or 10.56% of the market value of assets. Following a 200 basis point increase in interest rates, the Association's "post-shock" NPV, which provides a larger decline than a 200 basis point decrease, was $26.5 million, or 3.48% of the market value of assets. The change in the NPV ratio or the As- sociation's Sensitivity Measure was -503 basis points. Under OTS capital re- quirements which have not been fully implemented, the decline in the NPV ratio at December 31, 1999 would reflect an above average interest rate risk. If the regulations are implemented as proposed, the Company would remain in compliance with the fully phased in capital requirements. Management reviews the quarterly OTS measurements and compares them to evaluations produced through internally generated simulation models. These measures are used in conjunction with NPV measures to identify excessive interest rate risk. Another method to calculate interest rate sensitivity is through "GAP" analy- sis. In a GAP analysis, assets and liabilities are analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "GAP." In a rising in- terest rate environment, an institution with a positive gap would be in a bet- ter position to invest in higher yielding assets, which would result in the yield on its assets increasing at a pace closer to the cost of its interest- bearing liabilities, than would be the case if it has a negative gap. During a period of rising interest rates, an institution with a negative gap would tend to have its assets repricing at a slower rate than one with a positive gap, which would tend to restrain the growth or decrease net interest income. The following table sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999 which are anticipated to reprice or mature in each of the future time periods shown. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to (i) repricing or (ii) the contractual terms of the asset or liability adjusted for prepayment rates. The prepayment rates for fixed-rate mortgage loans on one- to four-family residences are assumed to prepay at a rate of 9% per year and are net of deferred loan origination fees and the allowance for loan losses. Decay rates of 14% for passbook accounts, 17% for NOW accounts and 31% for money market deposit accounts are assumed. In addition, it is assumed that fixed maturity deposits are not withdrawn prior to maturity. Although management believes the assumptions are reasonable, they should not be regarded as necessarily indicative of the actual decay rates that may be experienced in the future. While a conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings. It makes no presumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. Certain shortcomings are inherent in this method of analysis. For example, al- though certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. - -------------------------------------------------------------------------------- 10 - --------------------------------------------------------------------------------
At December 31, 1999 ---------------------------------------------------------------------------------------------- More More Than More More More Three Than Three Six Months Than One Than Three Than Five More Months Months to to Twelve Year to Years to Years to Than or Less Six Months Months Three Years Five Years Ten Years Ten Years Total -------- ---------- ---------- ----------- ---------- --------- --------- -------- (Dollars in thousands) INTEREST EARNING ASSETS: Real estate loans: ARM loans.............. $ 2,892 $ 1,105 $ 4,199 $ 10,316 $ 2,423 $ 1,577 $ -- $ 22,512 Fixed Rates loans...... 11,080 11,042 22,092 81,018 68,089 183,238 114,132 490,691 Residential construction loans.... -- -- -- -- -- -- 7,577 7,577 Multi-family........... -- -- -- 27 127 168 178 500 Second mortgage loans.. 1,824 -- -- 81 7,980 1,101 26 11,012 Consumer loans......... 967 -- -- -- -- -- -- 967 Investment securities.. 49,775 375 768 8,247 2,980 41,430 167,864 271,439 FHLB stock............. -- -- -- -- -- -- 11,400 11,400 -------- --------- --------- --------- --------- --------- -------- -------- Total interest earning assets................. 66,538 12,522 27,059 99,689 81,599 227,514 301,177 816,098 INTEREST BEARING LIABILITIES: Passbook, club and other accounts........ 2,546 2,546 5,091 16,318 12,101 18,275 16,432 73,309 Money market and NOW Accounts.............. 2,719 2,719 5,437 14,936 9,189 10,946 6,313 52,259 Certificate accounts... 70,824 65,000 129,164 85,895 23,202 12,279 -- 386,364 Borrowings............. 30,000 -- -- -- 70,000 138,000 -- 238,000 Advances by borrowers for taxes and insurance......... 11,223 -- -- -- -- -- -- 11,223 -------- --------- --------- --------- --------- --------- -------- -------- Total interest bearing liabilities............ 117,312 70,265 139,692 117,149 114,492 179,500 22,745 761,155 -------- --------- --------- --------- --------- --------- -------- -------- Interest sensitivity gap.................... $(50,774) $ (57,743) $(112,633) $ (17,460) $ (32,893) $ 48,014 $278,432 $ 54,943 ======== ========= ========= ========= ========= ========= ======== ======== Cumulative interest sensitivity gap........ $(50,774) $(108,517) $(221,150) $(238,610) $(271,503) $(223,489) $ 54,943 $ 54,943 ======== ========= ========= ========= ========= ========= ======== ======== Cumulative interest sensitivity gap as a percentage of total assets........... (6.22%) (13.30%) (27.10%) (29.24%) (33.27%) (27.38%) 6.73% 6.73% Cumulative net interest earning assets as a percentage of cumulative interest bearing liabilities.... 56.72% 42.15% 32.43% 46.31% 51.42% 69.73% 107.22% 107.22%
- -------------------------------------------------------------------------------- 11 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - ------------------------------------------------------------------------------- Financial Condition The following table sets forth information concerning the composition of the Company's assets at December 31, 1999 and 1998. Dollar amounts are in thousands.
December 31, December 31, 1999 1998 ---------------- ---------------- Percent Percent of of Amount Total Amount Total -------- ------- -------- ------- ASSETS Cash and cash equivalent.................... $ 20,468 2.51% $ 21,543 2.81% Federal funds sold.......................... 33,000 4.04 36,175 4.71 Investment securities....................... 207,371 25.41 146,657 19.11 Conventional loans, net..................... 532,292 65.22 544,636 70.95 Other loans................................. 967 .12 899 .12 FHLB stock.................................. 11,400 1.40 9,000 1.17 Other assets................................ 10,624 1.30 8,696 1.13 -------- ------ -------- ------ TOTAL ASSETS............................... $816,122 100.00% $767,606 100.00% ======== ====== ======== ======
Total Assets Total assets increased by $48.5 million or 6.3% to $816.1 million at December 31, 1999 from $767.6 million at December 31, 1998. The increase in total assets was the result of increases in investment securities and FHLB stock. Offsetting these increases were decreases in conventional mortgages, net and federal funds sold. Investment Securities and Other Interest Earning Investments Investment securities increased by $60.7 million or 41.4% to $207.4 million at December 31, 1999 from $146.7 million at December 31, 1998. The increase was the result of the purchase of $90.2 million of municipal securities and a FHLB bond of $5.0 million. Offsetting these purchases was a decline in the net unrealized gain or loss on securities available-for-sale of $16.6 million, the maturity of a treasury note of $5.0 million, principal paydowns on CMO's of $4.7 million and the sale of municipal securities of $3.3 million. FHLB stock increased to $11.4 million at December 31, 1999 from $9.0 million at December 31, 1998. The $2.4 million or 26.7% increase was the result of the minimum amount of stock required by the FHLB increasing due to the additional borrowings obtained from the FHLB during the year. Federal funds sold decreased by $3.2 million or 8.8% to $33.0 million at December 31, 1999 from $36.2 million at December 31, 1998. The decrease was the result of the funds being use to help fund the purchase of investment securities offset by the investment of excess cash into federal funds sold. Conventional Mortgage Loans Conventional mortgage loans decreased by $12.3 million or 2.3% to $532.3 mil- lion at December 31, 1999 from $544.6 million at December 31, 1998. The decrease was the primarily the result of principal repayments of $96.7 million offset by the funding of conventional mortgage loans of $82.6 million. Conven- tional mortgage loans are comprised of residential mortgages, residential con- struction loans, home equity installment and line of credit loans and multi- family loans. At December 31, 1999, residential mortgage loans totaled $516.5 million or 94.9% of the total loan portfolio. At that date, $494.0 million or 95.6% consisted of fix-rate mortgage loans. Residential construction mortgage loans totaled $16.2 million or 3.0% of total loans and home equity loans to- taled $11.0 million or 2.0% of total loans. - ------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- The following table sets forth information concerning the Company's liabilities and stockholders' equity at December 31, 1999 and 1998. Dollar amounts are in thousands.
December 31, December 31, 1999 1998 ---------------- ---------------- Percent Percent of of Amount Total Amount Total -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits..................................... $511,931 62.73% $495,128 64.50% Borrowings................................... 238,000 29.16 180,000 23.45 Other liabilities............................ 11,673 1.43 18,576 2.42 Stockholders' equity......................... 54,518 6.68 73,902 9.63 -------- ------ -------- ------ TOTAL LIABILITIES STOCKHOLDERS' EQUITY...... $816,122 100.00% $767,606 100.00% ======== ====== ======== ======
Liabilities Total liabilities increased to $761.6 million at December 31, 1999 from $693.7 million at December 31, 1998. The $67.9 million or 9.8% increase was the result of increases in borrowings and deposits reduced by a decrease in deferred tax- es. Borrowings increased by $58.0 million or 32.2% to $238.0 million at Decem- ber 31, 1999 from $180.0 million at December 31, 1998. Total deposits increased by $16.8 million or 3.4% to $511.9 million at December 31, 1999 from $495.1 million at December 31, 1998. The increase was the result of certificate ac- counts increasing by $17.0 million. The total number of depositor accounts in- creased to 54,300 accounts at December 31, 1999 from 53,600 at December 31, 1998. The deferred tax liability decreased by $6.8 million to an asset of $4.4 million at December 31, 1999 from a liability of $2.4 million at December 31, 1998. The decrease was the result of the net unrealized net loss on investment securities available-for-sale. Capital Total stockholders' equity decreased by $19.4 million or 26.2% to $54.5 mil- lion at December 31, 1999 from $73.9 million at December 31, 1998. The primar- ily factors contributing to the decrease in total stockholders' equity was the purchase of $16.6 million in treasury stock, the decline of other comprehensive income, net of taxes of $10.1 million and dividends declared of $1.9 million, off set by net income of $8.0 million. - -------------------------------------------------------------------------------- 13 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- Average Balances, Interest and Average Yields The following table sets forth certain information relating to the Company's balance sheet at December 31, 1999, and average balance sheets and statements of income for the years ended December 31, 1999, 1998 and 1997, and reflect the tax equivalent average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the years presented. Average balances are based on average daily balances. The yields and costs include fees which are considered adjustments to yields. Interest income for 1999 and 1998 shown in the chart below is the tax equivalent interest income. Tax equivalent interest income is being used because interest on investment securities include tax-exempt securities. Tax- exempt securities carry pre-tax yields lower than comparable taxable assets. Therefore, it is more meaningful to analyze interest income on a tax-equivalent basis. Tax equivalent adjustments of $3.8 million and $1.1 million were made to interest income on investment securities in 1999 and 1998, respectively. The Company had no tax exempt securities in 1997.
At December 31, 1999 Year Ended December 31, 1999 ------------------------ ---------------------------- Average Average Balance Yield/Cost Balance Interest Yield/Cost ------------ ----------- -------- -------- ---------- (Dollars in thousands) Interest-earning Assets: Investment securities (1).............. $ 235,178 6.82% $241,728 $15,765 6.52% Conventional loans (2)(6).............. 532,291 7.09 535,222 38,975 7.28 Other loans............................ 967 6.92 937 65 6.94 Mortgage-backed securities............. -- -- -- -- -- Federal funds sold..................... 33,000 5.16 18,518 1,073 5.79 ------------ -------- ------- Total interest-earning assets........ 801,436 6.93 796,405 55,878 7.02 Non-interest earning assets.......... 14,686 12,190 ------------ -------- TOTAL ASSETS....................... $ 816,122 $808,595 ============ ======== Interest-bearing Liabilities: Passbook, club and other accounts (5).. $ 84,531 3.07% $ 85,151 $ 3,021 3.55% Money market and NOW accounts.......... 52,259 2.78 53,508 1,404 2.62 Certificate accounts................... 386,364 5.54 356,439 19,751 5.54 Borrowings............................. 238,000 5.64 230,335 12,886 5.59 ------------ -------- ------- Total interest-bearing liabilities... 761,154 5.11 725,433 37,062 5.11 Non-interest-bearing liabilities..... 450 18,836 ------------ -------- TOTAL LIABILITIES.................. 761,604 744,269 Stockholders' equity................... 54,518 64,326 ------------ -------- Total liabilities and stockholders' equity................................ $ 816,122 $808,595 ============ ======== Net tax equivalent interest income/net interest rate spread (3)................ 1.82% $18,816 1.91% ======= Net tax equivalent yield on average interest-earning assets (4)............. 2.36% Ratio of average interest-earning assets to average interest-bearing liabilities. 1.05 1.10
- ------- (1) Includes interest-bearing deposits in other financial institutions and FHLB stock. (2) Includes non-accrual loans, deferred net loan origination fees, undisbursed portion of loans in process, and allowance for loan losses. (3) Net interest rate spread represents the difference between the average yield on interest-earning assets, and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income as a percentage of aver- age interest-earning assets. (5) Includes advances by borrowers for taxes and insurance. (6) Interest on conventional loans includes loan fees of $723, $613, and $406 for the years ended December 31, 1999, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- 14 - --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------- 1998 1997 ---------------------------- ---------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost -------- -------- ---------- -------- -------- ---------- (Dollars in thousands) Interest-earning Assets: Investment securities (1)........... $115,109 $ 7,395 6.42% $ 66,212 $ 4,117 6.22% Conventional loans (2)(6)........... 566,367 41,848 7.39 558,398 41,397 7.41 Other loans......................... 831 58 6.98 917 67 7.31 Mortgage-backed securities.......... 4,979 284 5.70 55,505 3,148 5.67 Federal funds sold.................. 22,413 1,212 5.41 8,932 497 5.56 -------- ------- -------- ------- Total interest-earning assets..... 709,699 50,797 7.16 689,964 49,226 7.13 Non-interest earning assets....... 10,762 10,174 -------- -------- TOTAL ASSETS.................... $720,461 $700,138 ======== ======== Interest-bearing Liabilities: Passbook, club and other accounts (5)....................... $ 82,136 $ 2,480 3.02% $ 78,315 $ 2,288 2.92% Money market and NOW accounts....... 47,945 1,147 2.39 46,634 1,092 2.34 Certificate accounts................ 362,720 21,186 5.84 387,557 23,306 6.01 Borrowings.......................... 142,481 8,030 5.64 102,649 5,643 5.50 -------- ------- -------- ------- Total interest-bearing liabilities...................... 635,282 32,843 5.17 615,155 32,329 5.26 Non-interest-bearing liabilities.. 9,524 10,484 -------- -------- TOTAL LIABILITIES............... 644,806 625,639 Stockholders' equity................ 75,655 74,499 -------- -------- Total liabilities and stockholders' equity............................. $720,461 $700,138 ======== ======== Net tax equivalent interest income/net interest rate spread (3)............. $17,954 1.99% $16,897 1.88% ======= ======= Net tax equivalent yield on average interest-earning assets (4).......... 2.53% 2.45% Ratio of average interest-earning assets to average interest-bearing liabilities.......................... 1.12 1.12
- -------------------------------------------------------------------------------- 15 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabili- ties have affected the Company's interest income and interest expense during the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate mul- tiplied by prior volume) and (iii) the changes attributable to the combined im- pact of volume and rate. The change in interest due to both rate and volume in the rate/volume analysis table have been allocated to changes due to rate and volume in proportion to the absolute amounts of the changes in each. The aver- age rates for investment securities used to calculate the variances in the fol- lowing table, for 1999 and 1998, are tax equivalent rates.
Year Ended December 31, Year Ended December 31, 1999 vs. 1998 1998 vs. 1997 Increase (Decrease) in Increase (Decrease) in Net Interest Income Due to Net Interest Income Due to ---------------------------------------------------------------- Total Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) -------- -------- --------------------- ------- ------------ (In thousands) Interest-earning assets: Investment securities. $ 8,664 $ (294) $ 8,370 $ 3,504 $ (226) $ 3,278 Conventional loans.... (2,301) (572) (2,873) 591 (140) 451 Other loans........... 7 -- 7 (6) (3) (9) Mortgage-backed securities........... (284) -- (284) (2,866) 2 (2,864) Federal funds sold.... (211) 72 (139) 750 (35) 715 -------- -------- -------- --------- ------- --------- Total interest- earning assets..... 5,875 (794) 5,081 1,973 (402) 1,571 -------- -------- -------- --------- ------- --------- Interest-bearing liabilities: Passbook, club and other accounts....... 133 124 257 112 80 192 Money market and NOW accounts............. 91 450 541 31 24 55 Certificate accounts.. (367) (1,068) (1,435) (1,494) (626) (2,120) Borrowings............ 4,952 (97) 4,855 2,190 198 2,388 -------- -------- -------- --------- ------- --------- Total interest- bearing liabilities........ 4,809 (591) 4,218 839 (324) 515 -------- -------- -------- --------- ------- --------- Net change in net interest income........ $ 1,066 $ (203) $ 863 $ 1,134 $ (78) $ 1,056 ======== ======== ======== ========= ======= =========
December 31, 1999 Operating Results The following table presents selected components of net income for the years ended December 31, 1999, 1998 and 1997. Dollar amounts are in thousands.
For the Years Ended December 31, ----------------------- 1999 1998 1997 ------- ------- ------- Interest income........................................ $55,878 $50,798 $49,226 Interest expense....................................... 37,061 32,844 32,329 ------- ------- ------- Net interest income.................................... 18,817 17,954 16,897 Provision for loan loss................................ 120 90 45 Other income........................................... 598 643 829 Other expenses......................................... 6,116 5,643 5,060 Income taxes........................................... 5,137 5,026 5,046 ------- ------- ------- Net Income............................................. $ 8,042 $ 7,838 $ 7,575 ======= ======= =======
- -------------------------------------------------------------------------------- 16 - ------------------------------------------------------------------------------- Net income for the year ended December 31, 1999 increased by $204,000 or 2.6% to $8.0 million from $7.8 million for the year ended December 31, 1998. The increase was primarily the result of an increase in net interest income offset by an increase in other expenses. Interest Income Interest income discussed in this section is tax equivalent interest income. Tax equivalent adjustments of $3.8 million and $1.1 million were made for the years ended December 31, 1999 and 1998, respectively. Interest income increased by $5.1 million or 10.0% to $55.9 million for the year ended Decem- ber 31, 1999 from $50.8 million for the year ended December 31, 1998. The increase was primarily due to an increase in interest earned on investment securities offset by a decrease in interest earned on conventional mortgage loans. Interest on investment securities increased by $8.1 million or 140.9% to $13.9 million for the year ended December 31, 1999 from $5.8 million for the comparable 1998 period. The increase was the result of the average balance increasing to $208.4 million for the year ended December 31, 1999 from $84.3 million for the year ended December 31, 1998. Interest on conventional mortgage loans decreased by $2.9 million or 6.9% to $39.0 million for the year ended December 31, 1999 from $41.8 million for the year ended December 31, 1998. The decrease was the result of the average balance for conventional mortgage loans decreasing by $31.1 million or 5.5% to $535.2 million for the year ended December 31, 1999 from $566.4 million for the comparable 1998 period. Also contri-buting to the decrease was an eleven basis points decline in the average rate earned on conventional mortgage loans. The average rate earned on conventional mortgage loans for 1999 was 7.28% compared to 7.39% for 1998. Interest Expense Interest expense increased to $37.0 million for the year ended December 31, 1999 from $32.8 million for the year ended December 31, 1998. The $4.2 million or 12.8% increase was the result of an increase in interest expense on borrowings offset by a decrease in interest expense on deposits. Interest ex- pense on borrowings increased by $4.9 million or 60.5% to $12.9 million for the year ended December 31, 1999 from $8.0 million for the year ended December 31, 1998. The average balance on borrowings which increased to $230.3 million for the year ended December 31, 1999 from $142.5 million for the year ended December 31, 1998. Interest expense on deposits decreased by $638,000 or 2.6% to $24.2 million for the year ended December 31, 1999 from $24.8 million for the comparable 1998 period. The decrease was primarily the result of a decline in the average cost on certificate accounts. The average cost for 1999 was 5.54% compared to 5.84% for 1998. Net Interest Income Tax equivalent net interest income increased by $863,000 or 4.8% to $18.8 million for the year ended December 31, 1999 from $18.0 million for the year ended December 31, 1998. The increase was the result of interest income rising by $5.1 million offset by an increase in interest expense of $4.2 million. Provision for Loan Loss The provision for loan loss for 1999 was $120,000. The addition to the provi- sion is the result of an increase in the origination of jumbo, home equity and Community Reinvestment Act ("CRA") mortgages. In determining the provision for loan losses, management assesses the risk inherent in its loan portfolio in- cluding, but not limited to, an evaluation of the concentration of loans se- cured by properties located in the Pittsburgh area, the trends in national and local economies, trends in the real estate market and in the Company's loan portfolio and the level of non-performing loans and assets. The Company's his- tory of loan losses has been minimal, which management believes is a reflec- tion of the Company's underwriting standards. There were no charge-offs for the years ended December 31, 1999 and 1998. Management believes the current level of loan loss reserve is adequate to cover losses inherent in the portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods. Other Income Other income decreased by $45,000 or 7.0% to $598,000 for the year ended De- cember 31, 1999 from $643,000 for the year ended December 31, 1998. The de- crease was the result of gains on sales of investment securities declining to $45,000 for the year ended December 31, 1999 compared to $97,000 for the year ended December 31, 1998. In addition, a decline in miscellaneous income of $19,000 was primarily the result - ------------------------------------------------------------------------------- 17 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- of losses on real estate owned included in miscellaneous income. Offsetting these decreases was a rise in loan fees and service charges of $26,000 or 5.0%. Other Expenses Other expenses increased by $473,000 or 8.4% to $6.1 million for the year ended December 31, 1999 from $5.6 million for the year ended December 31, 1998. The increase was primarily the result of an increase in miscellaneous expenses. Miscellaneous expenses increased to $1.5 million for the year ended December 31, 1999 from $1.1 million for the comparable 1998 period. The $456,000 or 41.7% increase was due to expenses associated with the annual meeting and one- time non-recurring expenses related to the operation of the Association. Income Taxes Income taxes remained relatively flat for the years ended December 31, 1999 and 1998. Tax equivalent adjustments of $3.8 million and $1.1 million were made for the years ended December 31, 1999 and 1998, respectively. The annualized effective tax rate after the tax equivalent increase was 39.0% for 1999 and 39.1% for 1998. New Accounting Pronouncements For a discussion of new accounting pronouncements and their effect on the Com- pany, see note number 2 to the Consolidated Financial Statements. December 31, 1998 Operating Results Net income for the year ended December 31, 1998 increased by $263,000 or 3.5% to $7.8 million from $7.6 million for the year ended December 31, 1997. The increase was the result of a rise in tax equivalent interest income offset by increases in interest expense and other expenses and a decrease in other in- come. Interest Income As discussed previously, interest income discussed in this section is the tax equivalent income. A tax equivalent adjustment of $1.1 million has been made to interest on investment securities for the year ended December 31, 1998. The Company had no tax-exempt securities in 1997. Interest income increased $1.6 million or 3.2% to $50.8 million for the year ended December 31, 1998 from $49.2 million for the year ended December 31, 1997. The increase was the result of additional interest earned on investment securities, federal funds sold and conventional mortgage loans for the year ended December 31, 1998 as compared to the year ended December 31, 1997. Offsetting these increases was a decrease in interest earned on mortgage-backed securities which were sold during fiscal 1998. Interest earned on investment securities for the year ended December 31, 1998 increased by $3.3 million or 137.6% to $5.7 million from $2.4 million for the comparable 1997 period. The increase was primarily the result of the average balance in investment securities increasing by $50.1 million or 146.0% to $84.3 million for the year ended December 31, 1998 from $34.3 million for the year ended December 31, 1997. Interest earned on federal funds sold was $1.2 million for the year ended December 31, 1998 compared to $497,000 for the year ended December 31, 1997. The $715,000 or 143.9% increase was the result of the average balance of Federal Funds Sold rising to $22.4 million for the year ended December 31, 1998 from $8.9 million for the comparable 1997 period. Interest on conventional mortgage loans increased by $451,000 or 1.1% to $41.8 million for the year ended December 31, 1998 from $41.4 million for the year ended December 31, 1997. The increase was the result of the average balance rising $8.0 million or 1.4% to $566.4 million for the year ended December 31, 1998 from $558.4 million for the comparable 1997 period. Interest earned on mortgage- backed securities decreased by $2.9 million as the result of the sale of the remaining mortgage-backed securities as previously discussed. Interest Expense Interest expense for the year ended December 31, 1998 was $32.8 million as compared to $32.3 million for the year ended December 31, 1997. The increase was the result of a rise in interest expense on borrowings offset by a decrease in interest expense on deposits. Interest expense on borrowings increased by $2.4 million, or 42.3% to $8.0 million for the year ended December 31, 1998 from $5.6 million for the comparable 1997 period. The increase was the result of the average balance of borrowings increasing to $142.5 million for the year ended December 31, 1998 from $102.6 million for the year ended December 31, 1997. Interest expense on deposits decreased by $1.9 million or 7.0% to $24.8 million for the year ended December 31, 1998 from $26.7 million for the year ended December 31, 1997. The decrease was the result of the average balance of deposits declining to $480.8 million for the year - -------------------------------------------------------------------------------- 18 - ------------------------------------------------------------------------------- ended December 31, 1998 from $500.7 million for the comparable 1997 period. In addition, there was a 17 basis points decline on the average yield paid on certificate accounts. For the year ended December 31, 1998, the average yield was 5.84% compared to 6.01% for the year ended December 31, 1997. Net Interest Income Tax equivalent net interest income for the year ended December 31, 1998 increased by $1.1 million or 6.3% to $18.0 million from $16.9 million for the comparable 1997 period. This increase was the result of interest income increasing by $1.6 million offset by a rise in interest expense of $514,000. In addition, the net interest rate spread increased to 1.99% for 1998 from 1.88% for 1997. Provision for Loan Loss The provision for loan loss was $90,000 for 1998 compared to $45,000 for 1997. There were no charge-offs for the years ended December 31, 1998 and 1997. Other Income Other income decreased by $186,000 or 22.4% to $643,000 for the year ended December 31, 1998 from $829,000 for the comparable 1997 period. The decrease was primarily the result of a decline of $153,000 or 61.2% in gains on the sale of mortgage-backed securities and loans. In 1997 the sale of conventional mortgage loans and mortgage-backed securities resulted in a gain of $250,000 compared to the gain of $97,000 on the sale of the mortgage-backed securities in 1998. The mortgage-backed securities were sold due to high prepayment rate and the loans were sold to adjust the Company's interest rate risk position. In addition, miscellaneous income decreased by $24,000 primarily as a result of a decline in gains recorded from the sale of real estate owned. Other Expenses Other expenses increased by $583,000 or 11.5% to $5.6 million for the year ended December 31, 1998 from $5.1 million for the year ended December 31, 1997. The increase occurred due to increases in compensation, payroll taxes and fringe benefits, miscellaneous expenses, office occupancy expense and fed- eral insurance premiums. Compensation, payroll taxes and fringe benefits in- creased by $274,000 or 9.3% to $3.2 million for the year ended December 31, 1998 from $3.0 million for the year ended December 31, 1997. The increase was due to the average price of the Company's stock rising to $17.84 in 1998 from $16.00 in 1997. The Company's ESOP and stock compensation programs are expensed based on the average market price of the Company's stock. Miscellane- ous expenses increased by $176,000 or 19.2% to $1.1 million for the year ended December 31, 1998 from $917,000 for the comparable 1997 period. The increase was primarily the result of additional expenses associated with advertising and origination costs for home equity installment loans and lines of credit. Office occupancy expense increased by $83,000 or 20.0% to $498,000 for the year ended December 31, 1998 from $415,000 for the year ended December 31, 1997. The increase was the result of property taxes and prepaid service con- tracts expense rising during 1998. Federal insurance premiums rose by $44,000 or 16.9% to $305,000 for the year ended December 31, 1998 from $261,000 for the year ended December 31, 1997. The increase was the result of a 1996 fed- eral deposit insurance refund that was recorded in the first quarter of 1997. Income Taxes A tax equivalent adjustment of $1.1 million was made for the year ended De- cember 31, 1998. Income taxes for the year ended December 31, 1998 remained flat at $5.0 million. The annualized effective tax rate after the tax equiva- lent increase was 39.1% for 1998 and 40.0% for 1997. - ------------------------------------------------------------------------------- 19 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Management's Report on the Internal Control Structure and Compliance with Laws and Regulations - -------------------------------------------------------------------------------- January 24, 2000 To the Stockholders of First Bell Bancorp, Inc.: Financial Statements The management of First Bell Bancorp, Inc. ("the Company") is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The fi- nancial statements have been prepared in accordance with generally accepted ac- counting principles and, as such, include amounts based on informed judgements and estimates made by management. Internal Control Management is responsible for establishing and maintaining an effective inter- nal control structure over financial reporting, including safeguarding of as- sets, presented in conformity with both generally accepted accounting princi- ples and the Office of Thrift Supervision ("OTS") instructions for Thrift Financial Reports ("TFR") instructions. The structure contains monitoring mech- anisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any structure of inter- nal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control struc- ture can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control structure may vary over time. Management assessed the institution's internal control structure over financial reporting, including safeguarding of assets, presented in conformity with both generally accepted accounting principles and TFR instructions as of December 31, 1999. This assessment was based on criteria for effective internal control over financial reporting, including safeguarding of assets, described in Internal Control--Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company maintained an effective internal control structure over financial reporting, including safeguarding of assets, presented in confor-mity with both generally accepted accounting principles and TFR instructions as of December 31, 1999. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company's management. The Audit Committee is responsible for recommending to the Board of Directors, the selection of in- dependent auditors. It meets periodically with management, the independent au- ditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight rule of reviewing and monitoring the financial, accounting and auditing proce- dures of the Company in addition to reviewing the Company's financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe should be brought to the attention of the Com- mittee. Compliance with Laws and Regulations Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and regulations concerning dividend restrictions, both of which are designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and as- sessments as required by the OTS. Based on this assessment, Management believes that the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 1999. /s/ Albert H. Eckert, II Albert H. Eckert, II Chief Executive Officer /s/ Jeffrey M. Hinds Jeffrey M. Hinds Chief Financial Officer - -------------------------------------------------------------------------------- 20 Independent Auditors' Report - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of First Bell Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of First Bell Bancorp, Inc. and subsidiary, as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of First Bell Bancorp Inc.'s management. Our responsibility is to express an opin- ion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of First Bell Bancorp, Inc. and sub- sidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania January 24, 2000 - -------------------------------------------------------------------------------- 21 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Consolidated Balance Sheets (In thousands, except shares and per share data) - --------------------------------------------------------------------------------
December 31, ------------------ 1999 1998 ASSETS -------- -------- CASH AND CASH EQUIVALENTS: Cash on hand.................................................................. $ 1,857 $ 925 Noninterest-bearing deposits.................................................. 2,204 2,116 Interest-bearing deposits..................................................... 16,407 18,502 -------- -------- Total cash and cash equivalents............................................. 20,468 21,543 FEDERAL FUNDS SOLD.............................................................. 33,000 36,175 INVESTMENT SECURITIES HELD-TO-MATURITY--At cost (fair value of $5,242 and $10,766 at December 31, 1999 and 1998, respectively). 4,989 9,980 INVESTMENT SECURITIES AVAILABLE-FOR-SALE--At fair value (cost of $217,043 and $134,743 at December 31, 1999 and 1998, respectively).... 202,382 136,677 CONVENTIONAL LOANS--Net of allowance for loan losses of $925 and $805 at December 31, 1999 and 1998, respectively....................................... 532,292 544,636 OTHER LOANS--Net................................................................ 967 899 REAL ESTATE OWNED............................................................... 390 82 PREMISES AND EQUIPMENT--Net..................................................... 3,924 3,405 FEDERAL HOME LOAN BANK STOCK--At cost........................................... 11,400 9,000 ACCRUED INTEREST RECEIVABLE..................................................... 4,947 4,272 OTHER ASSETS.................................................................... 1,363 937 -------- -------- Total assets................................................................ $816,122 $767,606 ======== ======== 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY -------- -------- DEPOSITS: Passbook, club and other accounts............................................. $ 73,308 $ 73,578 Money market and NOW accounts................................................. 52,259 52,164 Certificate accounts.......................................................... 386,364 369,386 -------- -------- Total deposits.............................................................. 511,931 495,128 BORROWINGS...................................................................... 238,000 180,000 ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................... 11,223 11,354 ACCRUED INTEREST ON DEPOSITS.................................................... 703 600 ACCRUED INTEREST ON BORROWINGS.................................................. 864 863 ACCRUED INCOME TAXES............................................................ 93 120 DEFERRED TAX (ASSET) LIABILITY.................................................. (4,365) 2,424 DIVIDENDS PAYABLE ON COMMON STOCK............................................... 453 536 OTHER LIABILITIES............................................................... 2,702 2,679 -------- -------- Total liabilities........................................................... 761,604 693,704 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares issued or outstanding).............................................................. -- -- Common stock ($.01 par value; 20,000,000 shares authorized; 8,596,250 shares issued and 5,189,063 and 6,100,476 outstanding; one stock right per share)... 86 86 Additional paid-in capital.................................................... 62,217 61,768 Unearned ESOP shares.......................................................... (3,740) (3,972) Unearned MRP shares........................................................... (3,378) (3,839) Treasury stock, at cost (3,407,187 and 2,495,774 shares)...................... (55,523) (38,918) Accumulated other comprehensive (loss) income, net of taxes................... (8,931) 1,179 Retained earnings--substantially restricted................................... 63,787 57,598 -------- -------- Total stockholders' equity.................................................. 54,518 73,902 -------- -------- Total liabilities and stockholders' equity.................................. $816,122 $767,606 ======== ========
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 22 Consolidated Statements of Income (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Years Ended December 31, --------------------------- 1999 1998 1997 -------- -------- -------- INTEREST AND DIVIDEND INCOME: Conventional loans.............................. $ 38,974 $ 41,848 $ 41,397 Interest-bearing deposits....................... 1,027 1,152 1,343 Mortgage-backed securities...................... -- 284 3,148 Federal funds sold.............................. 1,073 1,212 497 Investment securities, taxable.................. 3,212 2,509 2,425 Investment securities, non-taxable.............. 6,981 2,104 -- Other loans..................................... 66 58 67 Federal Home Loan Bank stock.................... 757 482 349 -------- -------- -------- Total interest and dividend income............ 52,090 49,649 49,226 -------- -------- -------- INTEREST EXPENSE: Deposits........................................ 24,175 24,813 26,686 Borrowings...................................... 12,886 8,030 5,643 -------- -------- -------- Total interest expense........................ 37,061 32,843 32,329 -------- -------- -------- NET INTEREST INCOME............................... 15,029 16,806 16,897 PROVISION FOR LOAN LOSSES......................... 120 90 45 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........................................... 14,909 16,716 16,852 -------- -------- -------- OTHER INCOME: Service fees and charges........................ 542 516 525 Gain (loss) on sales of mortgage-backed securities available-for-sale.................. -- 97 (8) Gain on sale of conventional loans.............. -- -- 258 Gain on sale of investments available-for-sale.. 45 -- -- Miscellaneous income............................ 11 30 54 -------- -------- -------- Total other income............................ 598 643 829 -------- -------- -------- OTHER EXPENSES: Compensation, payroll taxes and fringe benefits. 3,193 3,227 2,953 Federal insurance premiums...................... 300 305 261 Office occupancy expense, excluding depreciation................................... 522 498 415 Depreciation.................................... 291 296 296 Computer services............................... 261 224 218 Miscellaneous expenses.......................... 1,549 1,093 917 -------- -------- -------- Total other expenses.......................... 6,116 5,643 5,060 -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES.......... 9,391 11,716 12,621 -------- -------- -------- PROVISION FOR INCOME TAXES: Current: Federal........................................ 925 3,048 3,665 State.......................................... 728 809 976 Deferred (benefit) expense...................... (304) 21 405 -------- -------- -------- Total provision for income taxes.............. 1,349 3,878 5,046 -------- -------- -------- NET INCOME........................................ $ 8,042 $ 7,838 $ 7,575 ======== ======== ======== BASIC EARNINGS PER SHARE.......................... $ 1.68 $ 1.41 $ 1.29 ======== ======== ======== DILUTED EARNINGS PER SHARE........................ $ 1.61 $ 1.35 $ 1.23 ======== ======== ========
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 23 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Consolidated Statements of Comprehensive Income (Loss) (In thousands) - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------- 1999 1998 1997 --------- -------- -------- Net Income........................................ $ 8,042 $ 7,838 $ 7,575 Unrealized gains (losses) arising during the period........................................... (16,551) 1,993 197 Less: reclassification adjustment for (gains) losses realized in net income.................... (45) (97) 8 --------- ------- ------- Other comprehensive income, before taxes.......... (8,554) 9,734 7,780 Tax benefit (expense)............................. 6,486 (834) (88) --------- ------- ------- Other comprehensive (loss) income, net of taxes... $ (2,068) $ 8,900 $ 7,692 ========= ======= =======
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 24 Consolidated Statements of Changes in Stockholders' Equity (In thousands) - --------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Unearned ------------------ ----------------- Paid-in ESOP Shares Par Value Shares Par Value Capital Shares -------- --------- ------ --------- ---------- -------- BALANCE, DECEMBER 31, 1996............... -- $-- 7,758 $86 $61,063 $(4,454) Purchase of treasury stock............. -- -- (1,247) -- -- -- Allocation of MRP shares............... -- -- -- -- 8 -- Allocation of ESOP shares.............. -- -- -- -- 300 237 Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- -- -- -- -- Dividends ($.40 per share)............. -- -- -- -- -- -- Net income............................. -- -- -- -- -- -- --- --- ------ --- ------- ------- BALANCE, DECEMBER 31, 1997............... -- -- 6,511 86 61,371 (4,217) Purchase of treasury stock............. -- -- (424) -- -- -- Allocation of MRP shares............... -- -- -- -- 67 -- Allocation of ESOP shares.............. -- -- -- -- 373 245 Exercise of options.................... -- -- 13 -- (43) -- Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- -- -- -- -- Dividends ($.40 per share)............. -- -- -- -- -- -- Net income............................. -- -- -- -- -- -- --- --- ------ --- ------- ------- BALANCE, DECEMBER 31, 1998............... -- -- 6,100 86 61,768 (3,972) --- --- ------ --- ------- ------- Purchase of treasury stock............. -- -- (911) -- -- -- Allocation of MRP shares............... -- -- -- -- 129 -- Allocation of ESOP shares.............. -- -- -- -- 320 232 Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- -- -- -- -- Dividends ($.40 per share)............. -- -- -- -- -- -- Net income............................. -- -- -- -- -- -- --- --- ------ --- ------- ------- BALANCE, DECEMBER 31, 1999............... -- $-- 5,189 $86 $62,217 $(3,740) === === ====== === ======= =======
Accumulated Other Unearned Comprehensive MRP Treasury Income, Retained Shares Stock Net of Taxes Earnings Total -------- -------- ------------- -------- -------- BALANCE, DECEMBER 31, 1996............... $(4,792) $(11,684) $ -- $46,214 $ 86,433 Purchase of treasury stock............. -- (20,393) -- -- (20,393) Allocation of MRP shares............... 502 -- -- -- 510 Allocation of ESOP shares.............. -- -- -- -- 537 Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- 117 -- 117 Dividends ($.40 per share)............. -- -- -- (1,796) (1,796) Net income............................. -- -- -- 7,575 7,575 ------- -------- -------- ------- -------- BALANCE, DECEMBER 31, 1997............... (4,290) (32,077) 117 51,993 72,983 Purchase of treasury stock............. -- (7,069) -- -- (7,069) Allocation of MRP shares............... 451 -- -- -- 518 Allocation of ESOP shares.............. -- -- -- -- 618 Exercise of options.................... -- 228 -- -- 185 Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- 1,062 -- 1,062 Dividends ($.40 per share)............. -- -- -- (2,233) (2,233) Net income............................. -- -- -- 7,838 7,838 ------- -------- -------- ------- -------- BALANCE, DECEMBER 31, 1998............... (3,839) (38,918) 1,179 57,598 73,902 ------- -------- -------- ------- -------- Purchase of treasury stock............. -- (16,604) -- -- (16,604) Allocation of MRP shares............... 461 -- -- -- 590 Allocation of ESOP shares.............. -- -- -- -- 552 Change in unrealized gain in securities available-for-sale, net of taxes...... -- -- (10,110) -- (10,110) Dividends ($.40 per share)............. -- -- -- (1,854) (1,854) Net income............................. -- -- -- 8,042 8,042 ------- -------- -------- ------- -------- BALANCE, DECEMBER 31, 1999............... $(3,378) $(55,522) $ (8,931) $63,786 $ 54,518 ======= ======== ======== ======= ========
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 25 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT Consolidated Statements of Cash Flows (In thousands) - --------------------------------------------------------------------------------
Years Ended December 31, ----------------------------- 1999 1998 1997 -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................... $ 8,042 $ 7,838 $ 7,575 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................... 291 296 296 Deferred income taxes.......................... (304) 21 405 Amortization of premiums and accretion of (93) (19) 195 discounts..................................... Provision for loan loss........................ 120 90 45 Compensation expense--allocations of ESOP and 1,055 1,175 1,055 MRP shares.................................... Loss (gain) on sale of real estate owned....... 11 (13) (37) Gain on sale of conventional loans............. -- -- (258) Loss (gain) on sale of mortgage-backed -- (97) 8 securities available-for-sale................. Gain on sale of investments available-for-sale. (45) -- -- Net proceeds from sale of conventional loans... -- -- 29,662 Increase or decrease in assets and liabilities: Accrued interest receivable................... (676) (1,069) (444) Accrued interest on deposits.................. 103 65 32 Accrued interest on borrowings................ 1 531 141 Accrued income taxes.......................... (26) (109) 148 Other assets.................................. (426) (322) (170) Other liabilities............................. 195 296 (100) Dividends payable............................. (83) (39) (138) -------- --------- -------- Net cash provided by operating activities....... 8,165 8,644 38,415 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities available-for- (90,188) (132,770) (25,947) sale........................................... Purchase of mortgage-backed securities -- -- (92,528) available-for-sale............................. Net decrease (increase) in Federal Funds........ 3,175 (34,625) 71,325 Maturity of investment securities held-to- 5,000 -- 5,000 maturity....................................... Maturity of investment securities available-for- -- 10,000 10,000 sale........................................... Principal paydowns on mortgage-backed securities -- 1,402 14,000 available-for-sale............................. Net proceeds from sale of mortgage-backed -- 30,352 46,668 securities available-for-sale.................. Net proceeds from sale of investment securities 3,317 -- -- available-for-sale............................. Principal paydowns on investment securities 4,700 3,974 -- available-for-sale............................. Net decrease (increase) in conventional loans... 11,765 33,958 (78,145) Net decrease (increase) in other loans.......... (68) 8 42 Purchase of Federal Home Loan Bank stock........ (2,400) (3,852) (1,149) Net proceeds from sale of real estate owned..... 140 128 342 Purchase of premises and equipment.............. (810) (209) (96) -------- --------- -------- Net cash used in investing activities........... (65,369) (91,634) (50,488) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW accounts and savings accounts.................. (174) 10,891 3,704 Net increase (decrease) in certificate accounts. 16,977 (10,818) 7,410 Advances by borrowers for taxes and insurance... (132) (872) 1,404 Net increase in borrowings...................... 58,000 90,000 20,000 Dividends paid.................................. (1,938) (2,271) (1,935) Proceeds from stock options exercised........... -- 149 -- Purchase of treasury stock...................... (16,604) (7,069) (20,393) -------- --------- -------- Net cash provided by financing activities....... 56,129 80,010 10,190 -------- --------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS......... (1,075) (2,980) (1,883) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...... 21,543 24,523 26,406 -------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR............ $ 20,468 $ 21,543 $ 24,523 ======== ========= ======== SUPPLEMENTAL DISCLOSURES: Cash paid for: Interest on deposits and advances by borrowers for taxes and insurance....................... $ 24,073 $ 24,747 $ 26,655 Interest on borrowings......................... 12,886 7,500 5,502 Income taxes................................... 1,731 3,936 4,606 Noncash transactions: Transfers from conventional loans to real estate acquired through foreclosure........... 459 201 104 Increase in additional paid-in capital--ESOP and MRP allocations........................... 449 397 308 Transfers from conventional mortgage loans to conventional mortgage loans held-for-sale..... -- -- 29,989 Unrealized (loss) gain on securities available- for-sale...................................... (16,596) 1,896 205
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 26 Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- 1.BASIS OF PRESENTATION The principal business of the Company is to operate a traditional customer oriented savings and loan association. The Association's business is primarily conducted through six branch offices located throughout the suburban Pittsburgh, Pennsylvania area and its principal office in the borough of Bellevue. The Company's principal executive office is located in Wilmington, Delaware. The consolidated financial statements include the accounts of First Bell Bancorp, Inc. ("First Bell") and its wholly-owned subsidiary, Bell Federal Savings and Loan Association of Bellevue (the "Association" or "Bell Feder- al", collectively the "Company"). All significant intercompany transactions have been eliminated in consolidation. The investment in Bell Federal on First Bell's parent company financial statements is carried at the parent company's equity in the underlying net assets. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with general practices within the banking industry. In preparing such consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses dur- ing the period. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Federal Home Loan Bank System--The Association is a member of the Fed- eral Home Loan Bank ("FHLB") system. As a member, the Association is re- quired to maintain a minimum investment in capital stock of the FHLB of not less than 1% of the Association's outstanding conventional mortgage loans or 0.3% of its total assets. Deficiencies, if any, in the required investment at the end of any reporting period are purchased in the sub- sequent reporting period. The Association receives dividends on its FHLB stock. b. Cash and Cash Equivalents--For the purpose of presenting the consoli- dated statements of cash flows, cash on hand and interest and noninterest-bearing deposits with original maturities of less than 90 days are considered cash equivalents. The Association services mortgage loans for the Federal National Mort- gage Association ("FNMA"). The Association is required to restrict cash balances equal to the corresponding escrow funds. As of December 31, 1999 and 1998, restricted cash of approximately $427,000 and $502,000, respectively, has been segregated on the books of the Association. The Association's reserve requirements imposed by the Federal Reserve Bank averaged approximately $1,132,000 and $1,004,000 for the years ended December 31, 1999 and 1998, respectively. c. Investments and Mortgage-Backed Securities--The Company follows State- ment of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt and Equity Securities," for investments and mortgage-backed securities. Investments and mortgage-backed securities that may be sold as part of the Company's asset/liability or liquidity management or in response to or in anticipation of changes in interest rates and prepay- ment risk or other factors are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses on such secu- rities are reported net of related taxes as other comprehensive income and as a separate component of stockholders' equity. Securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Realized gains and losses on sales of all securities are reported in earnings and are com- puted using the specific identification cost basis. Premiums are amortized and discounts are accreted to maturity using the level yield method. The Company does not maintain a trading account. d. Conventional Loans--Interest on loans is credited to income as earned. Interest earned that has not been collected is accrued. Interest accrued on loans delinquent more than 90 days is offset by a reserve for uncollected interest and is, therefore, not recognized as income. Origi- nation fees and costs related to activities performed for a loan origi- nation are deferred - -------------------------------------------------------------------------------- 27 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- and recognized over the contractual life using the level yield method in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." e. Servicing of Loans--The total amount of loans serviced for others was $19,088,000, $24,388,000 and $31,407,000, at December 31, 1999, 1998 and 1997, respectively. During 1997, $29,989,000 of conventional mortgage loans were sold to FNMA in which the servicing of such loans were maintained by the Association and a related servicing asset of $237,000 was recorded. The servicing asset is being amortized over the expected life of the servicing agreement. f. Allowance for Loan Losses--The allowance for loan losses is determined by management, taking into consideration the past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrowers' ability to repay and estimated values of under- lying collateral and current economic conditions in the Association's lending area. While management uses the best information available to estimate losses on loans, future additions to the allowance may be necessary for changes in economic conditions beyond the Association's control. g. Real Estate Owned--Real estate owned is initially recorded at the lower of carrying value or fair value less estimated costs to sell. Subse- quently, such real estate is carried at the lower of fair value less es- timated costs to sell or its initial recorded value. Reductions in the carrying value of real estate subsequent to acquisition are recorded through a valuation allowance. Costs related to the development and im- provement of the real estate are capitalized, whereas those costs relat- ing to holding the real estate are charged to expense. Recovery of the carrying value of real estate acquired in settlement of loans is dependent to a great extent on economic, operating and other conditions that may be beyond the Company's control. h. Premises and Equipment--Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amor-tization. De- preciation and amortization are computed on a straight-line basis over the estimated useful lives (3-50 years) or leasehold period, if shorter, of the related assets. i. Deposits--Interest on deposits is accrued and charged to operating ex- pense monthly and is paid in accordance with the terms of the respective accounts. j. Income Taxes--The Company follows the provisions of SFAS No. 109, "Ac- counting for Income Taxes." SFAS No. 109 requires the asset and liabil- ity method of accounting for income taxes, under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between the fi- nancial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. k. Other Comprehensive Income--The Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which became effective for financial statements for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Prior years financial statements have been reclassified for comparative purposes. - -------------------------------------------------------------------------------- 28 - ------------------------------------------------------------------------------- The following table sets forth the related tax effects allocated to each element of comprehensive income for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------------------- ------------------------ ----------------------- Tax Tax Tax (Expense) Net-of- Pre- (Expense) Net- Pre- (Expense) Net- Pre-tax or tax tax or of-tax tax or of-tax Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount -------- --------- -------- ------ --------- ------ ------ --------- ------ Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period. $(16,551) $6,468 $(10,083) $1,993 $(872) $1,121 $197 $(85) $112 Less: reclassification adjustment for (gains) losses realized in net income................ (45) 18 (27) (97) 38 (59) 8 (3) 5 -------- ------ -------- ------ ----- ------ ---- ---- ---- Net unrealized gains (losses).............. (16,596) 6,486 (10,110) 1,896 (834) 1,062 205 (88) 117 -------- ------ -------- ------ ----- ------ ---- ---- ---- Other comprehensive income................. $(16,596) $6,486 $(10,110) $1,896 $(834) $1,062 $205 $(88) $117 ======== ====== ======== ====== ===== ====== ==== ==== ====
The following table sets forth the components of accumulated other compre- hensive income for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------- ------ ---- Beginning balance...................................... $ 1,179 $ 117 $ -- Net unrealized gains on securities, net of taxes....... (10,110) 1,062 117 -------- ------ ---- Ending balance......................................... $ (8,931) $1,179 $117 ======== ====== ====
l. Segment Information--In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," which was effective for financial statements for periods beginning after December 15, 1997. The Company has determined that it only has one oper- ating segment which is the operation of a thrift, therefore, will not be presenting any further segment information. m. Earnings Per Share--Basic EPS is computed by dividing net income avail- able to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders, adjusted for dilutive secu- rities, by the weighted average number of common shares outstanding, ad- justed for dilutive securities. n. Treasury Stock--Treasury stock is recorded at cost. o. Interest Rate Risk--A significant portion of the Company's assets con- sist of long-term fixed-rate residential mortgage loans, while a significant portion of the Company's liabilities consist of deposits with considerably shorter terms. As a result of these differences in the maturities of assets and liabilities, any significant increase in inter- est rates will have an adverse effect on the Company's results of operations. To manage this interest rate risk, the Company maintains high levels of liquid assets to enable it to quickly respond to changes in interest rates. p. New Accounting Pronouncements Not Yet Adopted--In June 1998, the FASB issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting stan- dards for derivative instruments, including certain derivative instru- ments embedded in other contracts, and for hedging activities. The pro- visions of this statement are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management is in the process of evaluating the impact of this statement on the consolidated financial statements. 3.STOCKHOLDER RIGHTS PLAN The Company adopted a Stockholder Rights Plan on November 18, 1998 in which preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock held as of the close of busi- ness on November 30, 1998 and for each share of Company Common Stock issued (including shares distributed from Treasury) by the Company thereafter and prior to the Distribution Date. - ------------------------------------------------------------------------------- 29 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- Each Right will entitle stockholders to buy one one-thousandth of a share of Series A Preferred Stock of the Company at an exercise price of $50.00. The Rights will be exercisable only if a person or group acquires benefi- cial ownership of 10% or more of the Company's outstanding Common Stock or commences a tender or exchange offer upon consummation of which a person or group would beneficially own 10% or more of the Company's outstanding Com- mon Stock. If any person becomes the beneficial owner of 10% or more of Company's Com- mon Stock or a holder of 10% or more of the Company's Common Stock engages in certain self-dealing transactions or a merger transaction in which the Company is the surviving corporation and its Common Stock remains outstand- ing, then each Right not owned by such person or certain related parties will entitle its holder to purchase, at the Right's then-current exercise price, units of the Company's Series A Preferred Stock having a market value equal to twice the then-current exercise price. In addition, if First Bell is involved in a merger or other business combination transactions with another person after which its Common Stock does not remain outstand- ing, or sells 50% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right's then-current exercise price, shares of common stock of the ultimate parent of such other person having a market value equal to twice the then-current exercise price. First Bell will generally be entitled to redeem the Rights at $0.01 per Right at any time until the 10th business day following public announcement that a person or group has acquired 10% or more of the Company's Common Stock. 4.INVESTMENT SECURITIES HELD-TO-MATURITY The following is a summary of investment securities held-to-maturity at De- cember 31 (in thousands):
1999 ----------------------------- Gross Gross Amor- Unreal- Unreal- tized ized ized Fair Cost Gain Loss Value ------ ------- ------- ------ Treasury bills................................. $4,985 $182 $-- $5,167 Other investments.............................. 4 71 -- 75 ------ ---- --- ------ $4,989 $253 $-- $5,242 ====== ==== === ======
1998 ------------------------------ Gross Gross Amor- Unreal- Unreal- tized ized ized Fair Cost Gain Loss Value ------ ------- ------- ------- Treasury bills................................ $9,976 $701 $-- $10,677 Other investments............................. 4 85 -- 89 ------ ---- --- ------- $9,980 $786 $-- $10,766 ====== ==== === =======
The carrying value and fair value of investment securities held-to-maturity by contractual maturity as of December 31, 1999, are shown below (in thousands):
Amortized Fair Cost Value --------- ------ Due after one year through five years...................... $4,985 $5,167 Due after five years through ten years..................... 4 75 ------ ------ $4,989 $5,242 ====== ======
There were no sales of investment securities held-to-maturity during the years ended December 31, 1999, 1998 and 1997. 5. INVESTMENT SECURITIES AVAILABLE-FOR-SALE These investments consist of municipal securities, collateralized mortgage obligations ("CMO's") and a FHLB Bond. The following is a summary of in- vestment securities available-for-sale at December 31, 1999 and 1998 (in thousands):
1999 ----------------------------------- Gross Gross Amor- Unreal- Unreal- tized ized ized Fair Cost Gain Loss Value -------- ------- -------- -------- Municipal securities..................... $199,141 $ -- $(14,373) $184,768 CMO's.................................... 12,902 12 (153) 12,761 FHLB Bond................................ 5,000 -- (147) 4,853 -------- ------ -------- -------- $217,043 $ 12 $(14,673) $202,382 ======== ====== ======== ======== 1998 ----------------------------------- Gross Gross Amor- Unreal- Unreal- tized ized ized Fair Cost Gain Loss Value -------- ------- -------- -------- Municipal Securities..................... $117,159 $1,980 $ (153) $118,986 CMO's.................................... 17,584 107 -- 17,691 -------- ------ -------- -------- $134,743 $2,087 $ (153) $136,677 ======== ====== ======== ========
In 1999, proceeds from the sale of municipal securities available-for-sale were $3,317,000 resulting in - -------------------------------------------------------------------------------- 30 - -------------------------------------------------------------------------------- gross and net gains of $45,000. There were no sales of investment securi- ties available-for-sale during the years ended December 31, 1998 and 1997. The carrying value and fair value of investment securities available-for- sale by contractual maturity as of December 31, 1999, are shown below (in thousands):
Amortized Fair Cost Value --------- -------- Due after five years through ten years................... $ 37,218 $ 35,884 Due after ten years...................................... 179,825 166,498 -------- -------- $217,043 $202,382 ======== ========
The expected maturity may differ from the contractual maturity for the mu- nicipal securities and the FHLB Bond because most of these securities have a call feature that is earlier than the contractual maturity date. For the CMO's, the expected maturity may differ from the contractual maturity be- cause borrowers may have the right to prepay obligations with or without prepayment penalties. 6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE There were no mortgage-backed securities available-for-sale held at Decem- ber 31, 1999 and 1998. Proceeds from sales of mortgage-backed securities available-for-sale were $30,352,000 and $46,668,000 for the years ended December 31, 1998 and 1997, respectively. The sales resulted in gross gains of $200,000 and $94,000, and gross losses of $103,000 and $102,000 for the years ended December 31, 1998 and 1997, respectively. 7.CONVENTIONAL LOANS The following is a summary of conventional loans as of December 31, 1999 and 1998 (in thousands):
1999 1998 -------- -------- Conventional mortgages..................................... $516,514 $535,864 Residential construction loans............................. 16,229 17,924 Multi-family loans......................................... 500 651 Second mortgage loans...................................... 11,012 4,508 -------- -------- 544,255 558,947 Less: Deferred net loan origination fees......................... 2,386 3,152 Undisbursed portion of construction loans in process....... 8,652 10,354 Allowance for loan losses.................................. 925 805 -------- -------- $532,292 $544,636 ======== ========
Conventional mortgages consist of one- to four-family fixed and adjustable rate loans. The Company grants loans throughout the greater Pittsburgh, Pennsylvania metropolitan area. The mortgagor's ability to repay the loans outstanding is, therefore, dependent on the economy of that area. Nonaccrual loans totaled $269,000 and $498,000 at December 31, 1999 and 1998, respectively. The Association does not accrue interest on loans past due 90 days or more. Uncollected interest on total nonaccrual loans amounted to $6,000, $32,000 and $29,000 for the years ended December 31, 1999, 1998 and 1997, respectively. During 1997, the Company reclassified approximately $29,989,000 of conventional mortgages classified as held to maturity to held-for-sale, and subsequently sold all such conventional mortgages, resulting in a gain of approximately $258,000. The Company reclassified and sold such mortgages in efforts to better manage the Company's interest rate risk. - -------------------------------------------------------------------------------- 31 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - ------------------------------------------------------------------------------- 8.ALLOWANCE FOR LOAN LOSSES The following is an analysis of the changes in the allowance for loan losses for the years ended December 31 (in thousands):
1999 1998 1997 ---- ---- ---- Balance, beginning of year................................... $805 $715 $665 Provision for loan losses.................................... 120 90 45 Recovery of previous loan chargeoffs......................... -- -- 5 ---- ---- ---- Balance, end of year......................................... $925 $805 $715 ==== ==== ====
9.PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31 (in thousands):
1999 1998 ------ ------ Land and land improvements.................................... $ 529 $ 351 Office buildings and leasehold improvements................... 4,435 3,973 Furniture, fixtures and equipment............................. 1,874 1,722 ------ ------ 6,838 6,046 Less accumulated depreciation and amortization................ 2,914 2,641 ------ ------ $3,924 $3,405 ====== ======
The Company leases certain of its branch offices under various operating leases. Some of these leases contain renewal and extension clauses. The following is a summary of the future minimum lease payments under these op- erating leases (in thousands):
Year Ending Minimum Lease December 31, Payments ------------ ------------- 2000........................ $143 2001........................ 149 2002........................ 84 2003........................ 71 2004........................ 64 2005 and thereafter......... 128
Rental expense under these leases was approximately $157,000, $163,000 and $161,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 10.DEPOSITS The following is a summary of deposits and stated interest rates as of De- cember 31 (in thousands):
Stated Rate 1999 1998 ------------- -------- -------- Balance by interest rate: Passbook, club and other accounts.......... 3.00%--4.45% $ 73,308 $ 73,578 -------- -------- Money market and NOW accounts.............. 0.00%--3.21% 52,259 52,164 -------- -------- Certificate accounts....................... 3.00%--5.50% 217,751 175,279 5.51%--6.00% 119,707 123,361 6.01%--6.50% 29,773 47,976 6.51%--7.50% 14,350 16,779 7.51%--8.50% 2,750 2,806 8.51%--9.50% 2,032 2,887 9.51%--10.00% 1 298 -------- -------- 386,364 369,386 -------- -------- $511,931 $495,128 ======== ========
Noninterest-bearing demand deposits were approximately $3,791,000 and $5,428,000 at December 31, 1999 and 1998, respectively. The following is a summary of certificate accounts by contractual maturity at December 31, 1999 (in thousands):
Contractual Maturity ----------- 2000............................. $261,266 2001............................. 66,541 2002............................. 19,354 2003............................. 17,383 2004............................. 5,819 2005 and thereafter.............. 16,001 -------- $386,364 ========
The Association maintains insurance on deposits through the Savings Associ- ation Insurance Fund ("SAIF"), which is under the supervision of the Federal Deposit Insurance Corporation ("FDIC"). Deposits in excess of $100,000 are not insured by the SAIF. The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $43,732,000 and $38,128,000 at December 31, 1999 and 1998, respective- ly. - ------------------------------------------------------------------------------- 32 - -------------------------------------------------------------------------------- 11.BORROWINGS The following is a summary of borrowings as of December 31, (in thousands):
1999 Amount Rate Type Maturity Date ------ ---- ---------- ------------- $20,000 5.83% Fixed January 2000 8,000 6.96% Adjustable January 2000 2,000 6.84% Adjustable January 2000 70,000 5.61%(1) Fixed December 2004 40,000 5.79%(2) Fixed April 2008 25,000 5.66%(2) Fixed May 2008 45,000 5.60%(2) Fixed June 2008 28,000 4.99%(3) Fixed January 2009 1998 Amount Rate Type Maturity Date ------ ---- ---------- ------------- $70,000 5.46%(4) Fixed March 2002 40,000 5.79%(2) Fixed April 2008 25,000 5.66%(2) Fixed May 2008 45,000 5.60%(2) Fixed June 2008
The above borrowings are secured by the assets of the Company. ------- (1) At December 31, 1999, the interest rate was fixed at 5.61%. Every six months the Federal Home Loan Bank ("FHLB") has the option to convert this interest rate to an adjustable rate based on the three-month Lon- don Interbank Offered Rate ("LIBOR"). (2) The FHLB has the option to covert this interest rate to an adjustable rate based on the three-month LIBOR at the five year anniversary date of the borrowings origination, which will occur in the second quarter of 2003. (3) The FHLB has the option to convert this interest rate to an adjustable rate based on the three month LIBOR at the five year anniversary date of the borrowings origination, which will occur in the first quarter of 2004. (4) At December 31, 1998, the interest rate was fixed at 5.46%. Every six months the FHLB has the option to convert this interest rate to an ad- justable rate based on the three-month LIBOR. This borrowing was paid off in 1999. 12. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS The Association is subject to various regulatory capital requirements ad- ministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional dis- cretionary--actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective ac- tion, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practic- es. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I Capital to risk-weighted assets and of Tangible and Tier I Capital to total assets. Effective in April 1999, the minimum Tier I Capital to total assets ratio changed to 4.00%. The increase in the Tier I Capital to total assets ratio did not materially impact the Association. As of December 31, 1999, the Association met all capital adequacy requirements to which it is subject. The most recent notification from the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective ac- tion. To be categorized as well capitalized the Association must maintain minimum Total Capital to risk-weighted assets, Tier I Capital to risk- weighted assets and Tier I Capital to total assets ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. - -------------------------------------------------------------------------------- 33 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- The Association had the following amounts of capital and capital ratios at December 31, 1999 and 1998 (in thousands):
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ------------- ------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- --------- -------- As of December 31, 1999: Total Capital (to risk- weighted assets).......... $75,763 21.51% $28,176 8.00% $ 35,220 10.00% Tier I Capital (to risk- weighted assets).......... 74,838 21.25 N/A N/A 21,132 6.00 Tier I Capital (to total assets)................... 74,838 8.90 33,638 4.00 42,048 5.00 Tangible Capital........... 74,838 8.90 12,614 1.50 N/A N/A As of December 31, 1998: Total Capital (to risk- weighted assets).......... $74,264 22.41% $26,515 8.00% $ 33,144 10.00% Tier I Capital (to risk- weighted assets).......... 73,459 22.16 N/A N/A 19,886 6.00 Tier I Capital (to total assets)................... 73,459 9.53 23,123 3.00 38,539 5.00 Tangible Capital........... 73,459 9.53 11,562 1.50 N/A N/A
Tangible Capital and Tier I Capital (to total assets) capital ratios are computed as a percentage of total assets. Total Capital and Tier I Capital (to risk-weighted assets) ratios are computed as a percentage of risk- weighted assets. Risk-weighted assets were $352,195,000 and $331,439,000 at December 31, 1999 and 1998, respectively. At the date of the conversion from a mutual to a stock organization, the Association established a liquidation account in an amount equal to its retained income as of June 30, 1995. The liquidation account is maintained for the benefit of eligible account holders and supplemental eligible ac- count holders who continue to maintain their accounts at the Association after the conversion. The liquidation account is reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases in such balances will not restore an eligible account holder's or supplemental eligible account holder's interest in the liquida- tion account. In the event of a complete liquidation of the Association, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for ac- counts then held. The Association may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory require- ments. At December 31, 1999, the maximum dividend the Association may de- clare and pay to First Bell is approximately $32,432,000. 13.EARNINGS PER SHARE Both basic and diluted earnings per share are calculated as of December 31 as follows (in thousands, except per share amounts):
Weighted Average Per Income Shares Share 1999 ------ -------- ----- Income available to common stockholders................ $8,042 5,590 Unearned ESOP shares................................... -- (547) Unearned MRP shares.................................... -- (242) ------ ----- Basic earnings per share............................... 8,042 4,801 $1.68 ===== Effect of dilutive securities: MRP shares............................................ -- 65 Stock options......................................... -- 138 ------ ----- Diluted earnings per share............................. $8,042 5,004 $1.61 ====== ===== =====
- -------------------------------------------------------------------------------- 34 - --------------------------------------------------------------------------------
Weighted Average Per Income Shares Share 1998 ------ -------- ----- Income available to common stockholders................ $7,838 6,411 Unearned ESOP shares................................... -- (581) Unearned MRP shares.................................... -- (275) ------ ----- Basic earnings per share............................... 7,838 5,555 $1.41 ===== Effect of dilutive securities: MRP shares............................................ -- 99 Stock options......................................... -- 156 ------ ----- Diluted earnings per share............................. $7,838 5,810 $1.35 ====== ===== ===== Weighted Average Per Income Shares Share 1997 ------ -------- ----- Income available to common stockholders................ $7,575 6,784 Unearned ESOP shares................................... -- (615) Unearned MRP shares.................................... -- (308) ------ ----- Basic earnings per share............................... 7,575 5,861 $1.29 ===== Effect of dilutive securities: MRP shares............................................ -- 129 Stock options......................................... -- 144 ------ ----- Diluted earnings per share............................. $7,575 6,134 $1.23 ====== ===== =====
14.INTEREST EXPENSE The following is a summary of interest expense on deposits for the years ended December 31 (in thousands):
1999 1998 1997 ------- ------- ------- Passbook, club and other accounts.................... $ 3,021 $ 2,480 $ 2,288 Money market and NOW accounts........................ 1,404 1,147 1,092 Certificate accounts................................. 19,750 21,186 23,306 ------- ------- ------- $24,175 $24,813 $26,686 ======= ======= =======
15.INCOME TAXES Deferred income taxes reflect the net effects of temporary differences be- tween the carrying amounts of assets and liabilities for financial report- ing purposes and the bases used for income tax purposes. The tax effects of significant items comprising the net deferred tax asset (liability) at De- cember 31 are as follows (in thousands):
1999 1998 ------- ------- Deferred Tax Assets: Unrealized loss on investment securities available-for- sale..................................................... $ 5,731 $ -- Other..................................................... 199 193 ------- ------- Total deferred tax assets................................ 5,930 193 ------- ------- Deferred Tax Liabilities: Deferred loan origination fees............................ (751) (750) Allowance for loan losses................................. (449) (680) Depreciation on premises and equipment.................... (365) (239) Unrealized gain on investment securities available-for- sale..................................................... -- (754) Other..................................................... -- (194) ------- ------- Total deferred tax liabilities........................... (1,565) (2,617) ------- ------- Net deferred tax asset (liability)....................... $ 4,365 $(2,424) ======= =======
The provision for income taxes consists of the following components for the year ended December 31 (in thousands):
1999 1998 1997 ------ ------ ------ Current: Federal............................................... $ 925 $3,048 $3,665 State................................................. 728 809 976 Deferred (benefit) expense............................. (304) 21 405 ------ ------ ------ Total provision for income taxes..................... $1,349 $3,878 $5,046 ====== ====== ======
The following table presents the principal com-ponents of deferred income tax expense as of December 31 (in thousands):
1999 1998 1997 ----- ----- ---- Allowance for loan losses................................ $(232) $(221) $(13) Deferred loan origination fees........................... 1 269 425 Depreciation differences................................. 126 (12) 4 Other--net............................................... (199) (15) (11) ----- ----- ---- $(304) $ 21 $405 ===== ===== ====
- -------------------------------------------------------------------------------- 35 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- The reconciliation between the federal statutory tax rate and the Company's effective income tax rate for the year ended December 31 is as follows:
1999 1998 1997 ----- ---- ---- Statutory tax rate......................................... 34.0% 34.0% 34.0% State income taxes......................................... 5.1 4.6 5.2 Tax exempt interest income................................. (25.3) (5.8) -- Other--net................................................. 0.6 0.3 0.8 ----- ---- ---- Effective tax rate....................................... 14.4% 33.1% 40.0% ===== ==== ====
In accordance with SFAS No. 109, the Company has provided for deferred in- come taxes for the differences between the bad debt deduction for tax and financial statement purposes incurred after December 31, 1987. Deferred taxes have not been recognized with respect to pre-1988 tax basis bad debt reserves. In the event that the Company were to recapture these reserves into income, it would recognize tax expense of approximately $1.7 million. As a result of legislation enacted in 1996, however, this liability will not be recaptured if the Company were to change its depository institution charter. 16.EMPLOYEE BENEFIT PLANS Defined Benefit Pension Plan--The Company had a defined benefit pension plan for substantially all employees. During 1999, the Company terminated the Defined Benefit Pension Plan. The termination is considered a settle- ment as defined in SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined benefit Pension Plans and for Termination Bene- fits." At the option of the employee, all plan assets were distributed either through the purchase of a non-participating annuity contract or lump sum distribution. The Company was relieved of primary responsibility for any pension benefit obligation. The termination eliminated significant risks related to the obligation and the assets used to effect the settle- ment. On May 10, 1999, the final contribution was made which resulted in an expense of $100,000. The benefits of the defined benefit plan were gener- ally based on the years of service and the employee's compensation during the last five years of employment. The Defined Benefit Pension Plan was amended in the prior year to freeze benefit accruals effective March 31, 1998 and to fully vest all active Par- ticipants on April 1, 1998. Such amendment constituted a curtailment as de- fined by SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Bene- fits." The effects of such curtailment are reflected in the following ta- bles. - -------------------------------------------------------------------------------- 36 - -------------------------------------------------------------------------------- The following tables reconcile the projected benefit obligation, plan as- sets, funded status, and accrued/prepaid pension cost of the plan for the years ended December 31 (in thousands):
1999 1998 ---- ------ CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year.............. $-- $1,182 Service cost................................................... -- 18 Interest cost.................................................. -- 77 Curtailment.................................................... -- (68) Benefits paid.................................................. -- (78) Actuarial (gain) or loss....................................... -- (58) Change in discount rate........................................ -- 39 --- ------ Projected benefit obligation at end of year.................... $-- $1,112 === ====== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year................. $-- $1,173 Actual return on plan assets................................... -- 73 Employer contributions......................................... -- 76 Benefits paid.................................................. -- (78) --- ------ Fair value of plan assets at end of year....................... $-- $1,244 === ====== FUNDED STATUS Funded status at end of year................................... $-- $ 132 Unrecognized net actuarial loss................................ -- 126 Unrecognized prior service cost................................ -- -- Unrecognized transition asset.................................. -- (47) --- ------ Net amount recognized.......................................... $-- $ 211 === ====== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost.......................................... $-- $ 211 Accrued benefit liability..................................... -- -- Intangible asset.............................................. -- -- Amount included in comprehensive income....................... -- -- --- ------ Net amount recognized.......................................... $-- $ 211 === ====== DEVELOPMENT OF (ACCRUED) PREPAID PENSION COST Prepaid pension cost at beginning of year...................... $-- $ 32 FAS 87 net periodic pension cost (income)...................... -- 103 Contributions.................................................. -- 76 --- ------ Prepaid pension cost at end of year............................ $-- $ 211 === ======
- -------------------------------------------------------------------------------- 37 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - ------------------------------------------------------------------------------- Net periodic pension cost for the defined benefit plan includes the follow- ing components for the year ended December 31 (in thousands):
1999 1998 1997 ---- ----- ---- Components of Net Periodic Pension Cost Service cost--benefits earned during the period........... $-- $ 18 $ 65 Interest cost on projected benefit obligation............. -- 77 76 Expected return on assets................................. -- (74) (70) Amortization of initial unrecognized net obligation or (net asset) as of January 1, 1987........................ -- (5) (5) Amortization of prior service cost........................ -- (2) (7) Recognized net actuarial (gain) or loss................... -- -- 3 --- ----- ---- FAS 87 net periodic pension cost.......................... -- 14 62 Curtailment recognized during the year.................... -- (117) -- --- ----- ---- Total net periodic pension (income) cost................... $-- $(103) $ 62 === ===== ====
The following rate assumptions were used in the plan accounting as of De- cember 31:
1999 1998 1997 ---- ---- ---- Discount rate................................................ -- 6.70% 7.00% Rate of compensation increases............................... -- 5.00% 6.00% Expected long-term rate of return on plan assets............. -- 6.75% 7.00%
Deferred Supplemental Executive Retirement Plan--During 1992, the Board of Directors approved a deferred supplemental executive retirement plan for the President of the Association. The plan provides that the President will receive deferred compensation in an amount up to $60,000 per year based upon the return on assets of the Company for the year. The compensation will be paid to the President upon his retirement. For the years ended De- cember 31, 1999, 1998 and 1997, deferred compensation expenses under this plan were $60,000 per year. 401(k) Plan--The Association maintains a defined contribution 401(k) plan to provide benefits for substantially all employees. The plan provides for, but does not require, employees to make tax deferred payroll savings con- tributions. The Association is required to make a matching contribution based on the level of employee contribution. The total expense recorded un- der this plan for the years ended December 31, 1999, 1998 and 1997, was ap- proximately $9,900, $9,800 and $9,200, respectively. Employee Stock Ownership Plan--The Association has established the Bell Federal Savings and Loan Association of Bellevue Employee Stock Ownership Plan ("ESOP") which covers substantially all employees. The shares for the plan were purchased with the proceeds of a loan from the Company which will be repaid through the operations of the Association. Shares are allocated to employees, as principal and interest payments are made to the Company. Compensation expense related to the ESOP for 1999, 1998 and 1997, totaled $511,000, $586,000 and $537,000, respectively, based on the average fair value of shares committed to be released. The loan and related interest ex- pense on the loan are eliminated in these consolidated financial state- ments. The fair value of unallocated ESOP shares at December 31, 1999 was approximately $8,063,000. Shares held by the ESOP were as follows as of December 31:
1999 1998 1997 ------- ------- ------- Unallocated shares, beginning of year............. 561,562 596,089 629,622 Shares released for allocation.................... (32,823) (34,527) (33,533) ------- ------- ------- Unallocated shares, end of year................... 528,739 561,562 596,089 ======= ======= =======
Stock Option Plan--The Company has a fixed option plan that was approved by Shareholders on April 29, 1996. Options under this plan have been granted to certain officers and directors of the Company. The plan also permits op- tions to be granted to employees at the Company's discretion. Under the plan, the total number of shares of common stock that may be granted is 859,625. The Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation," and accordingly, no compen- sation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the - ------------------------------------------------------------------------------- 38 - -------------------------------------------------------------------------------- grant date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below as of December 31 (in thousands, except per share amounts):
Basic Diluted Earnings Earnings Net Per Per Income Share Share 1999 ------ -------- -------- As reported......................................... $8,042 $1.68 $1.61 Pro forma........................................... 7,856 1.64 1.57 Basic Diluted Earnings Earnings Net Per Per Income Share Share 1998 ------ -------- -------- As reported......................................... $7,838 $1.41 $1.35 Pro forma........................................... 7,500 1.35 1.29
Basic Diluted Earnings Earnings Net Per Per Income Share Share 1997 ------ -------- -------- As reported......................................... $7,575 $1.29 $1.23 Pro forma........................................... 7,025 1.20 1.15
The fair value of each option grant is estimated on the date of grant using the Black Sholes option pricing model with the following weighted average assumptions used for options granted in each respective year:
1997 ------- Dividend yield...................................................... 2.00% Expected volatility................................................. 29.00% Risk-free interest rate............................................. 5.60% Expected lives...................................................... 9 Years
The exercise price of all options was reduced from $13.375 to $10.70 during 1997 as a result of the return of capital distribution made on December 16, 1996. As a result, the Company was required to issue additional options to the existing participants in an amount equal to the difference between the value of the options in each participant's account before the reduction in the exercise price, and the value of the options in each participant's ac- count after the reduction in the exercise price. All options granted in 1997 are as a result of this equitable right adjustment. Approximately one- fifth of the stock options may be exercised after the end of each year, and no option will be exercisable after ten years from the date of grant. Ter- minated employees forfeit any non-vested options. The following summarizes the activity in the Stock Option Plan for the year ended December 31:
1999 1998 1997 ------- ------- ------- Options outstanding, beginning of year............ 380,486 437,288 361,037 Equitable right adjustment........................ -- -- 89,113 Options exercised................................. -- (13,931) -- Options forfeited................................. -- (42,871) (12,862) ------- ------- ------- Options outstanding, end of year.................. 380,486 380,486 437,288 ======= ======= ======= Weighted average exercise price, end of year...... $10.70 $10.70 $10.70 ======= ======= ======= Options exercisable, end of year.................. 228,285 152,188 90,030 ======= ======= ======= Options available for grant, end of year.......... 465,208 465,208 422,337 ======= ======= ======= Weighted-average fair value of options granted during the year.................................. $-- $-- $10.25 ======= ======= ======= Remaining contractual life of outstanding options. 7 Years 8 Years 9 Years
Master Stock Compensation Plan--The Association has a Master Stock Compen- sation Plan ("MRP") that was approved by Shareholders on April 29, 1996. Awards under this plan have been granted to certain officers, directors and management personnel of the Association. Under the MRP, a committee of the Board of Directors of the Association grants shares of common stock to em- ployees and directors. - -------------------------------------------------------------------------------- 39 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- Shares vest under the current awards at 20% per year, commencing one year from the date of grant subject to the attainment of certain performance goals. The cost of unearned shares related to these awards, included as a separate component of stockholders' equity, aggregated $3.4 million and $3.8 million at December 31, 1999 and 1998, respectively. Compensation cost is recorded over the five-year period as shares are earned based on the av- erage fair market value of the common stock during the fiscal year. The ex- pense for the years ended December 31, 1999, 1998 and 1997 was $545,000, $590,000 and $518,000 respectively. Terminated employees forfeit any non- vested awards. The following summarizes activity in the MRP for the year ended December 31:
1999 1998 1997 ------- ------- ------- Awards outstanding, beginning of year............. 99,171 129,428 180,260 Awards granted.................................... -- 2,100 1,500 Awards forfeited.................................. (1,400) -- (16,280) Awards vested..................................... (33,057) (32,357) (36,052) ------- ------- ------- Awards outstanding, end of year................... 64,714 99,171 129,428 ======= ======= ======= Total remaining MRP shares, end of year........... 242,384 275,441 307,798 ======= ======= =======
17.COMMITMENTS AND CONTINGENCIES The total commitments outstanding at December 31 are summarized as follows (in thousands):
1999 1998 ----------------- ----------------- Notional Notional Notional Notional Amount Rate Amount Rate -------- -------- -------- -------- 3--5 year adjustable rate mortgages..... $ 578 6.84% $ -- --% 15 year fixed rate mortgages............ 777 7.50 6,688 6.55 30 year fixed rate mortgages............ 3,185 7.51 9,785 7.00 Construction mortgages.................. 1,489 7.56 10,354 6.81 Home equity loans....................... 270 6.74 594 6.74 Available line of credit................ 58 6.40 1,233 7.91 ------ ------- $6,357 $28,654 ====== =======
In the normal course of business, the Association originates loan commit- ments. Loan commitments generally have fixed expiration dates or other ter- mination clauses and may require payment of a fee. The Association evalu- ates each customer's credit worthiness on a case-by-case basis. The amount of collateral deemed necessary by the Association is based on management's credit evaluation and the Association's underwriting guidelines for the particular loan. Additionally, the Company is also subject to certain asserted and unas- serted potential claims encountered in the normal course of business. In the opinion of management, neither the resolution of these claims nor the funding of credit commitments will have a material effect on the Associa- tion's financial position or results of operations. Credit related financial instruments have off-balance sheet credit risk be- cause only origination fees (if any) are recognized in the balance sheet (as "other liabilities") for these instruments until the commitments are fulfilled or expire. The credit risk amounts are equal to the notional amounts of the contracts, assuming that all counterparties fail completely to meet their obligations and the collateral or other security is of no value. - -------------------------------------------------------------------------------- 40 - -------------------------------------------------------------------------------- 18. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments as of December 31 are as follows (in thousands):
1999 1998 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Assets: Cash and noninterest-bearing deposits. $ 4,061 $ 4,061 $ 3,041 $ 3,041 Interest-bearing deposits............. 16,407 16,407 18,502 18,502 Federal Funds sold.................... 33,000 33,000 36,175 36,175 Investment securities held-to- maturity............................. 4,989 5,242 9,980 10,766 Investment securities available-for- sale................................. 202,382 202,382 136,677 136,677 Conventional loans.................... 532,292 513,506 544,636 551,979 Federal Home Loan Bank stock.......... 11,400 11,400 9,000 9,000 Liabilities: Passbook, club, money market, NOW and other accounts....................... $125,567 $125,567 $125,742 $125,742 Certificate accounts.................. 386,364 388,713 369,386 374,411 Borrowings............................ 238,000 225,225 180,000 189,646
a. Cash and Noninterest-bearing Deposits, Interest-bearing Deposits and Fed- eral Funds Sold--For cash and noninterest-bearing deposits, interest- bearing deposits and Federal funds sold, the fair value is estimated as the carrying amount. b. Investment Securities Held-to-Maturity and Investment Securities Available- for-Sale--Fair values for these securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. c. Conventional Loans--For conventional mortgages, fair value is estimated by discounting estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. d. Passbook, Club, Money Market, NOW and Other Accounts--The fair value of these accounts is the amount payable on demand, or the carrying amount at the reporting date. e. Certificate Accounts--The fair value of fixed-maturity certificates of de- posit is estimated by discounting future cash flows using the rates cur- rently offered for deposits of similar remaining maturities. f. Borrowings--The fair value of borrowings is estimated as the present value of the remaining payments of the borrowings using the year end FHLB inter- est rate for like borrowings. g. Off-balance Sheet Commitments to Extend Credit--The fair value of off-bal- ance sheet commitments to extend credit is estimated to equal the outstand- ing commitment amount. Management does not believe it is meaningful to pro- vide an estimate of fair value that differs from the outstanding commitment amount as a result of the uncertainties involved in attempting to assess the likelihood and timing of the commitment being drawn upon, coupled with the lack of an established market and a wide diversity of fee structures. - -------------------------------------------------------------------------------- 41 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- 19. PARENT COMPANY The following are condensed financial statements for First Bell as of De- cember 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 (in thousands): BALANCE SHEETS
1999 1998 ASSETS -------- -------- CASH AND INTEREST-BEARING DEPOSITS..................... $ 8 $ 2 FEDERAL FUNDS SOLD..................................... 600 -- INVESTMENT IN AND ADVANCES TO BELL FEDERAL............. 74,838 73,459 LOAN RECEIVABLE--ESOP.................................. 4,304 4,409 OTHER ASSETS........................................... 1,109 1,204 -------- -------- Total assets......................................... $ 80,859 $ 79,074 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY BORROWINGS............................................. $ 10,000 $ -- LOAN PAYABLE TO BELL FEDERAL........................... 6,691 5,604 ACCRUED INTEREST....................................... 126 -- ACCRUED INCOME TAXES................................... (215) 21 OTHER LIABILITIES...................................... 808 727 -------- -------- Total liabilities.................................... 17,410 6,352 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock ($.01 par value; 2,000,000 shares authorized; no shares issued)........................ -- -- Common stock ($.01 par value; 20,000,000 shares authorized; 8,596,250 shares issued and 5,189,063 and 6,110,476 outstanding: one stock right per share).... 86 86 Additional paid-in capital............................ 62,217 61,768 Unearned ESOP shares.................................. (3,740) (3,972) Unearned MRP shares................................... (3,378) (3,839) Treasury stock, at cost............................... (55,523) (38,919) Retained earnings..................................... 63,787 57,598 -------- -------- Total stockholders' equity........................... 63,449 72,722 -------- -------- Total liabilities and stockholders' equity........... $ 80,859 $ 79,074 ======== ========
- -------------------------------------------------------------------------------- 42 - -------------------------------------------------------------------------------- STATEMENTS OF INCOME
Year Ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- INTEREST INCOME: Interest bearing deposits....................... $ 7 $ 36 $ 39 Federal funds sold.............................. 32 59 77 Interest on ESOP loan receivable................ 357 382 386 ------- ------- ------- Total interest income......................... 396 477 502 ------- ------- ------- INTEREST EXPENSE................................. 942 412 300 ------- ------- ------- NET INTEREST (EXPENSE) INCOME.................... (546) 65 202 GENERAL AND ADMINISTRATIVE EXPENSES.............. 195 132 213 ------- ------- ------- LOSS BEFORE PROVISION FOR INCOME TAXES........... (741) (67) (11) ------- ------- ------- (BENEFIT) PROVISION FOR INCOME TAXES-- Current: Federal........................................ (265) (44) (18) State.......................................... 39 28 41 ------- ------- ------- Total (benefit) provision for income taxes.... (226) (16) 23 ------- ------- ------- LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY...................................... (515) (51) (34) Equity in undistributed earnings of Bell Federal....................................... 8,557 7,889 7,609 ------- ------- ------- NET INCOME....................................... $ 8,042 $ 7,838 $ 7,575 ======= ======= =======
- -------------------------------------------------------------------------------- 43 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------- 1999 1998 1997 -------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 8,042 $ 7,838 $ 7,575 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Bell Federal....................................... (8,557) (7,889) (7,609) Increase or decrease in assets and liabilities: Accrued income taxes.......................... (236) (59) 22 Accrued interest.............................. 126 (14) 14 Other assets.................................. 95 (1,011) 430 Other liabilities............................. 164 (7) (127) Dividends payable............................. (83) (39) (138) -------- ------- -------- Net cash provided by (used in) operating activities.................................. (449) (1,181) 167 -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in Federal Funds......... (600) 1,550 (1,325) Principal paydowns on ESOP loan receivable....... 105 84 76 Dividend from Bell Federal....................... 8,000 7,000 16,000 Investment in and advances to Bell Federal....... 405 598 3,087 -------- ------- -------- Net cash provided by investing activities.... 7,910 9,232 17,838 -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in borrowings....................... 10,000 -- -- Dividends paid................................... (1,938) (2,271) (1,935) Purchase of treasury stock....................... (16,604) (7,069) (20,393) Loan payable to Bell Federal..................... 14,377 1,365 4,400 Principal payment on loan payable................ (13,290) (84) (76) -------- ------- -------- Net cash used in financing activities........ (7,455) (8,059) (18,004) -------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 6 (8) 1 CASH, BEGINNING OF YEAR........................... 2 10 9 -------- ------- -------- CASH, END OF YEAR................................. $ 8 $ 2 $ 10 ======== ======= ======== SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes.................................... $ 42 $ 37 $ 93 Interest........................................ 816 426 286 Non-cash transactions: Increase in additional paid-in capital--ESOP and MRP share allocations.......................... 449 397 308
- -------------------------------------------------------------------------------- 44 - -------------------------------------------------------------------------------- 20. QUARTERLY EARNINGS SUMMARY (Unaudited) Quarterly earnings for the years ended December 31, 1999 and 1998 are as follows (in thousands, except per share amounts):
1999 ------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- INTEREST AND DIVIDEND INCOME..... $12,966 $12,959 $12,854 $13,311 INTEREST EXPENSE................. 8,898 9,215 9,379 9,569 ------- ------- ------- ------- NET INTEREST INCOME............. 4,068 3,744 3,475 3,742 PROVISION FOR LOAN LOSSES........ 30 30 30 30 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 4,038 3,714 3,445 3,712 OTHER INCOME..................... 123 139 180 156 OTHER EXPENSES................... 1,632 1,655 1,420 1,409 ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES.................... 2,529 2,198 2,205 2,459 PROVISION FOR INCOME TAXES....... 494 265 230 360 ------- ------- ------- ------- NET INCOME....................... 2,035 1,933 1,975 2,099 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME, NET OF TAX-- Unrealized gain (loss) on investments.................... (961) (5,224) (1,764) (2,161) ------- ------- ------- ------- COMPREHENSIVE INCOME............. $ 1,074 $(3,291) $ 211 $ (62) ======= ======= ======= ======= BASIC EARNINGS PER SHARE (1)..... $ 0.39 $ 0.40 $ 0.43 $ 0.47 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE (1)... $ 0.37 $ 0.38 $ 0.41 $ 0.45 ======= ======= ======= =======
1998 --------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- INTEREST AND DIVIDEND INCOME... $11,973 $12,145(2) $12,781 $12,750 INTEREST EXPENSE............... 7,536 7,769 8,763 8,775 ------- ------- ------- ------- NET INTEREST INCOME........... 4,437 4,376 4,018 3,975 PROVISION FOR LOAN LOSSES...... 20 10 30 30 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 4,417 4,366 3,988 3,945 OTHER INCOME................... 206 123 119 195 OTHER EXPENSES................. 1,400 1,404 1,432 1,407 ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES.................. 3,223 3,085 2,675 2,733 PROVISION FOR INCOME TAXES..... 1,297 1,127(2) 725 729 ------- ------- ------- ------- NET INCOME..................... 1,926 1,958 1,950 2,004 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized gain (loss) on investments.................. (65) 235 761 131 ------- ------- ------- ------- COMPREHENSIVE INCOME........... $ 1,861 $ 2,193 $ 2,711 $ 2,135 ======= ======= ======= ======= BASIC EARNINGS PER SHARE (1)... $ 0.34 $ 0.35 $ 0.35 $ 0.38 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE (1). $ 0.33 $ 0.33 $ 0.34 $ 0.36 ======= ======= ======= =======
- ------- (1) Quarterly per share amounts may not add to the total for the years ended December 31, 1999 and 1998, due to rounding. (2) Amounts reflect reclassification of $108,000 related to tax equivalent in- terest income. - -------------------------------------------------------------------------------- 45 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- First Bell Bancorp, Inc. Executive Management Albert H. Eckert, II Robert C. Baierl President and Chief Executive Officer Secretary Jeffrey M. Hinds Robert Murcko Executive Vice President and Assistant Secretary Chief Financial Officer William S. McMinn David F. Figgins Treasurer Vice President Directors Albert H. Eckert, II Jeffrey M. Hinds President and Chief Executive Officer Executive Vice President and First Bell Bancorp, Inc. and Chief Financial Officer Bell Federal Savings and Loan First Bell Bancorp, Inc. and Association of Bellevue Bell Federal Savings and Loan Association of Bellevue David F. Figgins Retired Vice President and General Manager Marshall Contractors, Inc. Theodore R. Dixon President Dixon Agency Thomas J. Jackson, Jr. Jack W. Schweiger Retired Attorney-at-Law President Houston Harbaugh Schweiger Homes Robert C. Baierl Peter E. Reinert President Partner Wright Contract Interiors Akerman, Senterfitt & Edison, P.A. William S. McMinn Senior Executive Vice President Aon Risk Services, Inc. of Pennsylvania - -------------------------------------------------------------------------------- 46 - -------------------------------------------------------------------------------- Bell Federal Savings and Loan Association of Bellevue Executive Management Albert H. Eckert, II Margaret L. Gerber President and Chief Executive Officer Assistant Vice President Jeffrey M. Hinds Robert Murcko Executive Vice President and Assistant Secretary Chief Financial Officer Jeffrey A. Spindler Thomas J. Jackson, Jr. Assistant Vice President Secretary Ronald S. Boltey William S. McMinn Assistant Vice President Treasurer Directors Albert H. Eckert, II Jeffrey M. Hinds President and Chief Executive Officer Executive Vice President and First Bell Bancorp, Inc. and Chief Financial Officer Bell Federal Savings and Loan First Bell Bancorp, Inc. and Association Bell Federal Savings and Loan Association David F. Figgins Retired Vice President and General Manager Marshall Contractors, Inc. Theodore R. Dixon President Dixon Agency Thomas J. Jackson, Jr. Jack W. Schweiger Retired Attorney-at-Law President Houston Harbaugh Schweiger Homes Robert C. Baierl Peter E. Reinert President Partner Wright Contract Interiors Akerman, Senterfitt & Edison, P.A. William S. McMinn Senior Executive Vice President Aon Risk Services, Inc. of Pennsylvania - -------------------------------------------------------------------------------- 47 Shareholder Information - ------------------------------------------------------------------------------- Market Summary of Stock First Bell Bancorp, Inc.'s common stock trades on The Nasdaq National Market. The following summary sets forth the range of prices for common stock over the periods noted. The common stock of the Company began trading on June 29, 1995. As of March 1, 2000, there were approximately 3,000 stockholders of record and 5,104,763 common shares outstanding.
1999 ----------------------- High Low Dividends ------ ------ --------- 1st Quarter............................................. 17.500 14.750 $0.10 2nd Quarter............................................. 20.313 16.500 $0.10 3rd Quarter............................................. 18.000 15.750 $0.10 4th Quarter............................................. 16.750 14.625 $0.10 1998 ----------------------- High Low Dividends ------ ------ --------- 1st Quarter............................................. 21.500 17.250 $0.10 2nd Quarter............................................. 21.375 18.250 $0.10 3rd Quarter............................................. 19.750 15.000 $0.10 4th Quarter............................................. 16.000 12.875 $0.10
Dividend Policy The management and Board of Directors of the Company continually review the Company's dividend policy. The Company intends to continue its policy of pay- ing quarterly dividends; however, the payment will depend upon a number of factors, including capital requirements, regulatory limita- tions, the Company's financial condition, results of operations and the Asso- ciation's ability to pay dividends to the Company. At present, the Company has no significant source of income other than dividends from the Association and to a lesser extent interest on short-term investments. Consequently, the Com- pany depends upon dividends from the Association to accumulate earnings for payment of cash dividends to its shareholders. See Note 12 to the Consolidated Financial Statements for a discussion of restrictions on the Association's ability to pay dividends. Nasdaq Listing Quotes on the common stock can be found on The Nasdaq stock market under the symbol "FBBC". Dividend Reinvestment First Bell Bancorp, Inc.'s registered shareholders may reinvest their divi- dends in additional shares of the Company's common stock and, if desired, pur- chase additional shares through a voluntary cash investment of $50 to $3,000 per quarter. Participants in the plan pay no broker fees. Purchases for the plan are generally made on the third Friday of January, April, July and Octo- ber. For more information on this service, call the Dividend Reinvestment De- partment of Registrar and Transfer Company at 1-800-368-5948. Annual Meeting The 2000 Annual Meeting of the Stockholders of First Bell Bancorp, Inc. will be held at 3:00 P.M. on Monday, April 24, 2000 at 629 Lincoln Avenue, Belle- vue, Pennsylvania 15202. Annual Report on Form 10-K and Exhibits A copy of the Annual Report on Form 10-K (excluding exhibits) of the Company for the year ended December 31, 1999, as filed with the Securities and Ex- change Commission, is available on the Association's web page or will be fur- nished free of charge, upon written request to stockholders who have not pre- viously received a copy from the Company. Written requests may be directed to: Shareholder Relations First Bell Bancorp, Inc. c/o Bell Federal Savings and Loan Association of Bellevue 532 Lincoln Avenue Pittsburgh, Pennsylvania 15202 The Company will furnish any exhibit to its Annual Report on Form 10-K upon payment of a reasonable fee. Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 Independent Auditors Deloitte & Touche LLP 2500 One PPG Place Pittsburgh, Pennsylvania 15222 Special Counsel Muldoon, Murphy and Faucette, LLP 5101 Wisconsin Avenue N.W. Washington, DC 20016 - ------------------------------------------------------------------------------- 48 FIRST BELL BANCORP, INC. 1999 ANNUAL REPORT - -------------------------------------------------------------------------------- First Bell Bancorp, Inc. Executive Offices 300 Delaware Avenue Wilmington, Delaware 19801 (302) 427-7883 Bell Federal Savings and Loan Association of Bellevue Office Locations Bellevue Office Wood Street Office* 532 Lincoln Avenue Sixth & Wood Street Bellevue, Pennsylvania 15202 Suite 100 (412) 734-2700 Pittsburgh, Pennsylvania 15222 Wexford Office* Mt. Lebanon Office* 10533 Perry Highway 300 Cochran Road Wexford, Pennsylvania 15090 Pittsburgh, Pennsylvania 15228 McKnight Road Office* Craig Street Office* 7709 McKnight Road 201 North Craig Street Pittsburgh, Pennsylvania 15237 Pittsburgh, Pennsylvania 15213 Sewickley Office 414 Beaver Street Sewickley, Pennsylvania 15143
- ------- *Bell Federal Savings maintains an Automated Teller Machine (ATM) at these locations. World Wide Web Address www.bellfederalsavings.com - -------------------------------------------------------------------------------- [LOGO] First Bell Bancorp, Inc. www.bellfederalsavings.com EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANT Exhibit 23.0 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-27444 of First Bell Bancorp, Inc. on Form S-8 of our report dated January 24, 2000, incorporated by reference in the Annual Report on Form 10-K of First Bell Bancorp, Inc. for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania March 30, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 4,061 16,407 33,000 0 202,382 4,989 5,242 533,259 925 816,122 511,931 30,000 2,702 208,000 0 0 86 54,432 816,122 39,040 12,293 757 52,090 24,175 37,061 15,029 120 45 6,116 9,391 9,391 0 0 8,042 1.68 1.61 2.36 269 0 0 0 805 0 0 925 925 0 925
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